In the midst of Puerto Rico's recovery from back-to-back hurricanes Irma and Harvey, Van Pate, a wealth strategist with RBC Wealth Management received a call from an advisor in Florida whose client wanted to help the country in a meaningful way.
The client held around $50,000 worth of Puerto Rico municipal bonds, explains Pate. “He wanted to (know) what he would need to do to go to the bond issuer and forgive the debt."
It was an unconventional request but by no means unheard of in Pate's experience. In times like these, people give and do so generously, but they also want to know their donations and support are genuinely being put to good use and having a positive impact.
“They want to maximize the benefit for the recipient," says the wealth strategist.
In 2016, American individuals, estates and foundations contributed an estimated $371.05 billion to U.S. charities, according to a report by Giving USA. It's an increase from last year and only the sixth time in the past 40 years that giving in all major categories – including religion; education; human services; health; public-society benefit; arts, culture and humanities; international affairs; environment and animals; and foundations – has risen across the board.
And while small amounts of philanthropy through giving and volunteering helps, when it comes to larger donations, ensuring your donation is being used in the most impactful way can be a nuanced affair, explains Cathy Walker, a senior trust consultant, at RBC Wealth Management.
“We'll have a client say 'I want to leave a $2 million estate or gift a million dollars to this particular charity' and in their thought, they're going to give it all at one time," says Walker. But a lump sum isn't always the best scenario. “Some of the smaller charities could potentially lose government support or local support because they all of a sudden have a big balance sheet – we also have to talk about making sure that the money is being used in a way the client feels is appropriate."
Find a qualified charity
The first step, says Walker, is to ensure it's a qualified charity – a nonprofit organization registered for tax-exempt status according to the U.S. Treasury.
“If I were making a donation directly to an animal shelter, I would want to make sure the animal shelter itself is in good standing with the IRS," she says. “Make sure they're doing what they're supposed to be doing – are they spending too much money on marketing and support or are they spending more of their money on actually taking care of the animals?"
Once you've established the charity aligns with your philanthropic goals, there are several tools that can be used to ensure you retain control over how the money is used while still meeting your wealth management and tax strategy goals.
Launch a Charitable Lead Trust
A Charitable Lead Trust (CLT) allows a donor to give a portion of the trust income to a charity over a specified period (typically their lifetime or a set number of years.) Through the CLT, the donor can receive either a gift tax charitable deduction or estate tax deduction. After the period has passed, the remaining assets are returned to the donor or beneficiary.
“The benefit here is they're now controlling how much money the charity gets over a period of time," says Mike Dowling, senior vice president and manager of City National Bank's personal trust division in Los Angeles. “(And) most charities will honor your request on how the money should be spent."
Establish a Charitable Remainder Trust
“A Charitable Remainder Trust is the opposite of a Charitable Lead Trust," explains Dowling. Essentially, the CRT is established to receive gifts of cash or other property on behalf of a qualified charity. In turn it allows the donor along, with other family members, to receive a lifetime payment from the trust (a term that usually doesn't exceed 20 years.) When the income beneficiaries die, the remaining assets pass on to the charity.
“It's an irrevocable trust meaning it can't be changed (by the donor)," he adds. While CRTs provide a strong tax incentive in that property held in the trust is no longer taxable, once the donation has been made, it's up to the trustees and the beneficiary as to how the money is used.
Set up a foundation
For higher net worth clients, setting up a foundation can be an effective way to influence how your charitable assets are used.
“(Often, the client has) taken care of their children during their lifetime (and) now wants to create a legacy that goes on for generations beyond their lifetime," says Dowling.
With a foundation, if you're not happy with how they're performing or you don't believe they have spent your money wisely you can redirect the funds to another. Often these family or private foundations will be run by directors and trustees to ensure they're executing the donor's vision. “(They're) required under IRS guidelines to actually disperse a minimum of five percent of the income earned on those assets to charitable causes that the foundation is towards."
The foundation can target any sort of purpose. For instance, Dowling has worked with one set up by two now-deceased clients, which supports students in the motion picture field. The trustees of the foundation solicit proposals from universities and donate to one that fit with the mission statement set out by the individuals who established the foundation.
Create a Donor-Advised Fund
A few years ago, Walker had a client approach her with ambition to give $2.5 million to a teaching hospital in Denver. “They were doing research on something he was personally very connected to, that he felt very strongly about," she explains. The donor was set to transfer $2.5 million in securities when the trust consultant stopped him. “We said 'be careful, you're not supporting the entire teaching hospital, what you're supporting is the research of the particular person.' "
Handing over a lump sum often means giving up control, something Walker pointed out to the donor. He'd have no rights on how the money was used if the researcher switched to another organization, which is what ended up happening. Luckily, the philanthropist had taken Walker's advice and set up a Donor-Advised Fund where payments could be made on an annual basis.
DAFs are set up as public charities with gifts to the fund qualifying for the maximum charitable deduction. Unlike a foundation, which usually starts around $5 million, DAFs can be established with $5,000.
“I call it Foundation Light," says Dowling. “(Except you) don't have to set up anything, the donor-advised fund does all the work and all the reporting."
While the fund isn't binding, typically charities go along with the requests of donors and if they don't seem to align with the philanthropists mission, they can re-direct the funds elsewhere.
In the end, it's about sharing the wealth, says Walker. She points to her client who backed the researcher at the teaching hospital.
“Hopefully, after two or three years they find the answer that they're looking for," she says. “And then maybe he wants to support another organization with this money – he's not tied to having just dumped all in one place and then not doing what he hoped."
City National Bank is a subsidiary of Royal Bank of Canada.