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Giving In-Kind to Maximize Legacy Gifts

Everyone knows that smart wealth management is part of the secret to financial success. That’s why even once we have achieved financial independence, we continue to steward our wealth, maximizing returns and minimizing risk, fees and taxes. But what about giving money away? Are we as prudent with our donations as we are with our investments and, most importantly, do we ensure the funds we donate go as far as they can?

Ethan Astaneh, wealth advisor and client relationship manager at Nicola Wealth, says we certainly ought to. Responding generously when a charity we treasure makes the ask is fabulous and maximizing the impact of our donations is even better.

“Having an integrated plan is critical when considering charitable giving in an estate plan,” Astaneh says. “At the end of the day, your capital at death will be divided between individuals, charities and the government. Having an integrated plan can mean that your family and charities receive more, thus reducing the amount paid to governments for taxes or probate fees.”

One universal misunderstanding that leads to higher than necessary taxes and fees is individuals giving cash instead of giving units of securities held in taxable investment accounts “in-kind”. But in-kind donations can be a game-changer in stretching your dollars to the maximum.

“The reason is giving in-kind avoids any capital gains associated with selling the securities to give cash,” he says. “So, you are effectively giving with before-tax dollars, whereas with cash donations you are giving with after-tax dollars.”

He also suggests a donor-advised fund or setting up a foundation if you have plans to give on an ongoing basis.

“The advantage of a donor-advised fund or a foundation is greater flexibility in tax planning,” Astaneh says.

For example, suppose you plan to give $10,000 per year to registered Canadian charities for the next 10 years; however, you happen to be facing a large tax event in this calendar year and you expect to be in a lower tax bracket in subsequent years.

“You can donate $100,000 up front and in-kind this year, to front-load the tax benefit against your high income this year, yet still you can distribute the $10,000 per year to charities from the donor-advised fund or foundation,” Astaneh says. “While the capital ‘waits’ in the donor-advised fund or foundation—for future distribution to charities—it can be invested and grow, which enhances the benefits that charities will receive.”

Since the donor-advised fund or foundation is itself a charitable entity, it does not pay any tax on investment gains. That means the $100,000 you were planning to give away over the next 10 years was transferred to a donor-advised fund or foundation to realize the tax benefit up-front, yet still you have the flexibility to distribute to charities over time.

For individuals who are in the highest marginal tax bracket on an ongoing basis, consider buying Flow Through Shares as part of an ongoing giving strategy. Since Flow Through Shares are a speculative investment that provide tax benefits, it is critical to review this strategy with a wealth professional to ensure suitability and to understand the various options.

“Under this approach, an individual can buy Flow Through Shares to realize tax benefits, and concurrently they can give securities in taxable accounts in-kind,” Astaneh says. “Combining these two strategies delivers the most tax-effective method for giving—it can cost an individual in the highest marginal tax bracket in BC as little as $1 to give $1,000 to charity.”

This arrangement will not suit every donor, but it gives you a glimpse of the possibilities when you combine the expertise of your accountant and financial advisor to harmonize your financial plan and leverage your giving to greatest effect. Be sure to work with an advisor to develop an integrated financial plan that incorporates not only retirement saving but tax planning, succession planning for your business (if applicable), estate planning and charitable giving, so all the moving parts work together.

You’ve worked too hard to let your legacy get diminished now and after you’re gone.

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This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.