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By CoraLee Baerg
“Philanthropist.” The word can conjure up images of Warren Buffett and Bill Gates and feel out of reach for the average businessperson in Saskatoon. But the fact is, business owners in every industry, big and small, are not only the backbone of the economy, they are also busy building up our community by giving back in significant ways.
Many business owners have experienced great success and have become significant contributors to the community by supporting causes near and dear to their hearts. Annual giving is likely already built into the business of most charitably minded business owners, but the bigger picture of legacy giving becomes top of mind as retirement looms and we start to consider estate planning.
Planning does not stop after the decision is made to leave a legacy gift.
Highly generous donors often share two common goals for their charitable giving:
• Making donations in a tax-efficient way, especially around big taxable events in their lives
• Passing on a legacy of giving for their children to continue
Perhaps the largest taxable event in many business owners’ lives will be their death. The deemed disposition of assets on death means that the CRA will be calling for their slice of the estate pie.
Think of the estate as being separated into three slices:
• Gifts to family
• Charitable donations
• Income and other taxes
Without any estate or post-mortem planning, CRA will dictate how large the tax slice of the estate will be according to the rules of the Income Tax Act. But what if there was an option to eliminate one slice of the pie? Which one would you pick? Most find this an easy question to answer.
Eliminating or drastically reducing tax at death can be as simple as having the estate make a donation sufficient to reduce final taxes to an amount more palatable to the taxpayer. This type of planning is accessible to anyone and can be applied equally to estates large and small. Those with a larger tax bill (and presumably larger estate) will simply need to make a larger gift to reduce the tax to zero than will those owing less tax.
Here’s a simple example: an estate owes $1 million in tax. It would need to make a gift of about $2.1 million to reduce income tax on the estate to zero.[i]
Now, this sounds like a good plan, and many people get excited about the notion of sending less to Ottawa, but where do the assets come from to make this large gift?
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Many business owners also want to make sure any donations made by their estate are not taking too much from the other pieces of the estate pie, such that their children will feel they are being disinherited. In some families, taking a small sliver out of the family slice is welcomed when the opportunity to share a legacy with the community is presented. In other families, maximizing the size of the entire estate, including both the family and charity portions, may be the goal. In either case, proper estate planning and implementation
of the requisite documents and strategies will ensure that your intentions for giving in the estate are articulated and that the necessary funding is provided precisely when needed.
Planning does not stop after the decision is made to leave a legacy gift. Depending on the size of the gift, the level of sophistication and involvement of family members, and other factors, a number of options are available for making that gift:
• Private family foundation
• Donor-advised fund or endowment fund at a public or community foundation
• Individual gifts given directly to charities
Each of these options has pros and cons that should be weighed before deciding which is best in each family’s circumstances. Once the appropriate vehicle for the gift has been determined, the final piece of the puzzle is how to pass on a legacy of philanthropy and engage the next generation in the practice of giving.
The recipe for each family will be different, but inclusion in giving both before and after the passing of the business owner engages children and teaches the family value of philanthropy. While the business owner is still alive, involving the younger generations in giving decisions will help them feel their input is valued and will help them make the connection between sharing the family wealth and seeing the impact in the community. This is also a good way to engage children who are not involved in a family business, who may at times feel left out of the group of family members who are involved in the business.
I heard about one family teaching philanthropy to their grandchildren by including them at the table when donation decisions were being made. The family had a large donor-advised fund from which they would make allocations each year to various charities. At a given age, the grandchildren would be given a budget and the task of identifying a charity they would like to support. The child would be invited to the annual family meeting to make decisions on donations, at which time they would give a presentation about where they would like to donate their allotted amount and why. Afterwards, the child and parent or grandparent would go to the charity, where the child would present the donation, and see first-hand what the charity is doing and how the money would be used.
What a wonderful way for the child to see the direct impact their family is having by sharing their excess with others. By building this into the child’s life from a relatively early age, the child would begin to develop a mindset that giving is important and may begin to be on the lookout for opportunities to give at their next annual meeting. Think of all the amazing presentations the family could hear if there were a handful of children making their giving report each year – it would be inspirational for the whole family!
This practice can extend beyond the life of the business owner. What a wonderful way to memorialize a family member: get together annually to decide which of mom/ dad/grandpa/grandma’s favourite causes the family should support.
Anyone can be a philanthropist. Whether your budget is $500 or $5 million, each family has the opportunity to both draw together toward a common goal and change the community we live in bit by bit.
[i] At today’s highest marginal tax rate for Saskatchewan of 47.5%.
First published in the September 2018 edition of The Business Advisor.