How to help clients 'disinherit the government' and adopt charity

Ask any behavioural economist, and they’ll probably tell you that a dollar is a dollar is a dollar, no matter how it’s spent or where it comes from. But if you tell that to Mark Halpern, he’ll be ready with a counterargument.

“In Canada, every two dollars given to charity saves the donor a dollar of tax. But beyond that, not all donations are the same,” Halpern, the CEO of WEALTHinsurance.com, told Wealth Professional. “Giving with cash, cheques, or credit cards costs 50 cents for every dollar donated. But if you donate other assets, the costs can be much less.”

In Halpern’s view, Canadians have three possible beneficiaries to their estate, and they can choose just two: family, charity, and the government in the form of taxation. While the vast majority choose family and charity, the taxman often gets to collect his fair share and more. And since it’s only a matter of time before capital gains taxes go up and we see a wealth and inheritance tax, the CRA’s share will only get bigger for those plans that don’t include philanthropy.

“What holds many of our clients back is the idea that by giving money to charity, they’ll be disinheriting their kids,” he said. “But with proper planning, that’s not the case at all: they effectively disinherit the government and adopt a charity.”

As the divide between the haves and have-nots grows wider, and with social safety nets stretching only so far, there’s a growing need for charitable organizations to pick up the slack. Over the course of the pandemic, many wealthy families have seen their fortunes increase, putting them in an even stronger position to make an impact.

“We’re seeing this trend playing out in Canada,” said Tina Tehranchian, senior wealth advisor at Assante Capital Management Ltd. “While the total amount of donations going to charities has gone down during the pandemic, we see a bigger concentration of donations coming from higher-income donors as some of them are making significantly more money than they used to.”

To maximize the difference their clients’ philanthropic dollars makes, Tehranchian said advisors should be well-versed in different planning strategies and tools. Life insurance, she said, is not well-understood or utilized by many financial advisors, but it can be useful in magnifying the impact of charitable bequests as they’re treated favourably from a tax perspective.

“As the population ages, people think more and more about estate planning and leaving bequests, which is very popular with a lot of wealthy baby boomers,” Tehranchian said. “That’s where insurance strategies can play a big part.”

Advisors can take that idea a step further, Halpern suggested, if their clients are able to leverage their CPP payments. The logic behind the idea, which he calls “CPP Philanthropy”, starts from the fact that CPP really doesn’t make that much difference for some people who are entitled to it.

A 65-year-old couple, he explained, may be eligible to collect $26,000 a year in CPP at one point, but they’d get taxed on it. If they don’t need it, they can just reinvest it, but it would be taxed again down the road.

“For the very wealthy, that $26,000 isn’t a life-changing amount. But if they were to use that money to buy a $1.5-million joint-last-to-die life insurance policy and name a charity as the owner, they wouldn’t have to pay any tax on their CPP, and they’ll have created a $1.5-million donation,” Halpern said. “Alternatively, they can collect the CPP and pay the tax, then use the money to buy the policy and donate that $1.5 million upon death; the full $1.5 million would go to the charity, and the estate would save $750,000 in taxes.”

With a massive wave of intergenerational wealth transfers set to happen over the next decade, many advisors will have clients who are on the cusp of retiring and selling their business. Because that usually triggers a big capital gains tax, Tehranchian said it makes sense for business owners who are philanthropic to make a large charitable donation in the year that the sale happens so the charitable donation tax credit can reduce their overall taxes.

“That’s one reason why donor-advised funds have become so popular,” she said. “For someone who’s philanthropic and makes a five-figure donation every year, and then suddenly is facing a million-dollar tax bill from a business sale in one year, that person can set up a donor-advised fund and make a lump-sum donation to the fund to eliminate or mitigate the tax for that year. Over time, they can make grants through their donor advised fund as part of the regular disbursements that have to be made each year to their preferred charities.”

With the recent trend of grey divorces, as well as the tendency for women to outlive men in old age, many wealthy individuals find themselves with RRSPs or RRIFs and no spouse to pass it along to, which means that wealth is automatically taxed at 53.5% (in Ontario) upon their death. That means a $1 million RRSP/RRIF will only be worth $465,000 to their heirs.  Halpern said clients facing that kind of dilemma with their registered money may want to consider giving it to charity, which ensures the full amount goes to a good cause.

Given the increasing important role of philanthropy in planning, Halpern encourages all advisors to develop their competency in it by joining organizations like the Canadian Association of Gift Planners or earning a credential such as the newly introduced Master Financial Advisor-Philanthropy designation, for which he is a teaching faculty member.

“At a minimum, I believe advisors should find and collaborate with a hyper-specialist in this area, because the cost of not doing it is too great … If you as an advisor aren’t talking to your clients about this, somebody else will, which can be a big risk to them and to you as well,” he said. “Ultimately, I think advisors must realize they are the gatekeepers to their client’s wealth and legacies; therefore, strategic philanthropy must be part of a comprehensive estate and tax plan. And we must have these conversations while the sun is still shining.”