By Loren Francis on November 12, 2020
What is Strategic Philanthropy?
For donors who wish to truly maximize the impact of their giving they should really think about developing a strategic plan rather than taking a random approach; or one that is simply dictated by the numerous requests one might receive. To be truly effective in your giving, develop a proper plan to optimize impact and efficacy so that you can feel good about the difference you are making and understand the impact you are having. You might call this giving with purpose.
The desire to promote the welfare of others, expressed especially by the generous donation of money to good causes. Charity aims to relieve the pain of a particular social problem, whereas philanthropy attempts to address the root cause of the problem.
As with business planning, a thoughtful and engaging strategy will help determine what you want to achieve from your giving, and how to do it most effectively.
You may know where you want to direct your donation dollars. However, it may be difficult to prioritize given the range of pressing needs and requests; and the vast number of charitable organizations that exist. There are so many causes to choose from: social, health, education, environmental, community, children, women, diversity & inclusion, reconciliation, arts, music, sports, animals, and the list goes on. Defining a clear focus facilitates giving in a manner that is not ad hoc, or just giving to all the requests that come your way. By having a properly thought out philanthropic plan, you can politely decline requests for donations that do not fall into your plan. You can suggest that your giving is complete for the year, and then explore whether certain requests fit with your strategy.
- Donor Advised Fund
- What about a Family Foundation?
- Leaving a Legacy Gift
- The Gift of Insurance
- A Move Towards Impact Investing
Philanthropic Ways to Give
- Give annually or make a pledge for a certain time frame
- Join a Giving Circle or Collective
- Set up a Donor Advised Fund either through a Community Foundation or a financial institution
- Create a Family Foundation
- Leaving a legacy gift by way of your Will or an Insurance Policy
It is my view that defining the mission, and objectives and purpose of your Philanthropic Strategy is of paramount importance to have framed before choosing the giving vehicle that suits you and your family. The time and focus put into your giving strategy will prove invaluable in determining the most appropriate vehicle to employ in delivering your strategy, as well as help you to determine the level of involvement you wish to have.
Many people prefer to give annually in an impactful way and may decide on their own, or with family, to allocate to specific causes once a year. This allows for flexibility and minimal administration and costs.
Some people may wish to be involved in a Giving Circle or Collective and be part of a larger gift to specific causes. A Giving Circle or Collective is a group of individuals with a common interest who pool contributions and collectively decide where to donate their funds.
Other people may prefer using a Donor Advised Fund or a Family Foundation which may grant amounts to charities of choice each year.
Another common way of giving is through a legacy gift by way of your Will or by a life insurance policy which designates the charitable organization as the beneficiary.
There are basically two ways to give: Directly or Indirectly.
Direct giving can be done by annual gifts, a pledge over a certain number of years, or through a Giving Circle or Collective. This can be done with either cash or a donation of securities or capital property. In Canada, the gifting of securities or capital property offers tax savings when the gift has embedded capital gains. The donor receives full value for the gift of securities or capital property without incurring the capital gains tax. As the charity is not for profit, there is no capital gains tax realized on the immediate sale of securities or capital property to the charity. This provides a significant opportunity for tax planned giving in Canada.
Indirect giving can be accomplished by way of a Donor Advised Fund, or a Family Foundation.
Donor Advised Fund
A Donor Advised Fund might be accessed either through a Community Foundation, or a financial institution. Community Foundations are local organizations such as the Toronto Community Foundation or the Oakville Community Foundation, and often focus on causes that affect the local community. Today there are over 160 Community Foundations across Canada. Community Foundations provide excellent guidance on selection of causes and can help make decisions on where to donate. Many financial institutions have set up Donor Advised Funds for their clients. Giving through a Donor Advised Fund at a Community Foundation is common when a donor wishes to gift within the local community or leave a legacy to the local community. Donor Advised Funds are often used by donors that may not have the time to do proper due diligence or to spend time carefully selecting charities of choice. They may have a small amount of funds to donate, or they may not want to deal directly with grant seekers. The Community Foundation or Donor Advised Fund through a financial institution can provide the help, oversight and administration of giving.
What about a Family Foundation?
Typically, a Family Foundation may be the way to go when a family has significant funds, wants more engagement, and the ability to apply their own expertise and experience to their giving. A Family Foundation offers flexibility and can involve family members in the decision making. Involvement allows families to shape their gift more personally. More engagement of family allows for desired goals and outcomes, learning experiences, a sense of accomplishment – ideally making more thoughtful and informed decisions. And long-term strategic giving typically engages the donor in a more structured, sustained and engaged way.
Family Foundations can allow for several family members to come together. This can help shape common values and family identity, while teaching younger generations about values, investment management, resource allocation, project evaluation and the impact of their giving. Philanthropy can be a fertile training ground for children with respect to family values.
Families usually create foundations for long term giving and legacy purposes, however, more and more family foundations are being set up as “time-limited” or “sunset” foundations. Foundations set up for perpetuity can leave a lasting imprint and create an enduring legacy. However, some families wish to see immediate impact of their giving. They want to make a difference today, not tomorrow. These foundations, also known as “spend-down” or “limited life” foundations are accounting for more and more newly created foundations. This is because the founders may wish to see impact happen during their lifetime, to narrow the focus, to make transformative gifts and to tend to the urgency of today’s challenges. Or they may have no one to pass the foundation on to. The desire to make transformative change is increasingly resonating with philanthropic families.
It is important to note that once a Donor Advised Fund or Family Foundation is funded, the funds cannot be returned to the donor. The funds are invested usually in the capital markets, and an annual amount must be distributed as per the CRA rules (today 3.5% of the value of the fund must be annually granted/distributed to charities). The set up of each of these will have different administration and associated costs including investment management fees. When there is an opportunity for a significant gift of securities, such as the sale of a large portfolio or a company, then a Foundation might be the way to go so that decisions about giving can be made over a longer term horizon, while the taxable benefit can be immediate and up front.
A Family Foundation is the most highly structured form of giving however it also requires the most time and effort to make it successful. You may wish to think about a Family Foundation if you are truly interested in making a difference and being involved. You should have time to be personally engaged and wish to have hands on experience with grant seekers. And you may wish to engage family members in the decision process. Should you wish to include family members, it is important to think about the relationships among each other and who wants to be involved. You would be wise to determine a level of interest prior to setting up a foundation.
If deciding on a Family Foundation, you will want to ensure that the foundation is of a sufficient size to carry the costs and administration. You will also want to work with an investment manager that understands foundation requirements, will work with you to design an Investment Policy Statement, and that has a selection of investments that align with your goals and cashflow requirements. Most Family Foundations in Canada are between $1M – $10M in assets, with some significantly larger.
A Family Foundation can be structured either as a Trust (managed by Trustees) or as a Not for Profit Corporation which provides for limited liability. Both must register with the CRA as a charitable organization. A foundation must prepare reports on activities and distributions, declare assets and grants, and name all board members.
Choosing the best giving option, direct or indirect, will depend on several factors including motive, personal style, values, tax planning and interest, as well as costs and ongoing administration. Foundations require time, commitment, administration and tax filings. However, they also allow for a high degree of control over management of assets.
Leaving a Legacy Gift:
Choosing to leave a charitable gift in your Will can result in a donation receipt that can reduce your taxes owed. A bequest is to designate a specific cash dollar amount, or percentage of residue of your estate to charity. An alternative to a cash bequest, may be a gift of securities or capital property (with embedded capital gains), or naming a charity as beneficiary of a registered account, which may further reduce taxes.
The Gift of Insurance:
Charitable giving using life insurance products is another option available which can also provide for an enduring legacy, along with tax benefits. There are three ways of using life insurance for gifting: donate your current insurance policy to a charity, name a charity as beneficiary of your insurance policy, or purchase a Charitable Insured Annuity.
A Move Towards Impact Investing:
Placing Long Term Capital in Alignment with the Mission of the Foundation
For Donor Advised Funds and Family Foundations, the initial and subsequent capital donations, would be invested to garner returns to fund the 3.5% annual distribution plus administrative and investment management fees.
More recently, much discussion has been had about the investment of long term capital funds of foundations and endowments. Should these invested funds also be in alignment with the philanthropic mission? Should the capital that is invested be aligned with the mission of the Donor Advised Fund or Family Foundation such that it is invested in a way that is ESG acceptable (ESG stands for Environmental, Social and Governance). Can capital be invested in Impact investments that are designed for a market return but also an impactful return? Do the goals of the investments match the philanthropic investments? More and more foundations are looking at becoming 100% impact oriented; or at the very least having a 10-20% allocation to Impact Investing. Can these investments be utilized to further the mission/vision of the intent? Can you use the capital in a way that, in addition to providing annual grants to charities, also aligns with and advances your mission? At HighView, we recently launched our Impact Investment Mandate which aligns with the United Nations 17 Sustainable Development Goals.
In summary, there is much to contemplate when it comes to Strategic Philanthropy. It is important to educate yourself, determine your areas of interest, and perhaps speak to other Family Foundations if this is a route you wish to explore. You may even want to hire a consultant on strategic philanthropy. The more you allow philanthropy in your life, it is highly likely the more you will find meaning, joy and purpose.
- Strategic Philanthropy: Many Paths to Choose Part 2: Philanthropic Ways to Give - November 12, 2020
- Strategic Philanthropy: Many Paths to Choose Part 1: Designing A Philanthropy Strategy - October 15, 2020
- Utilizing Investment for Impact: Part 2 - October 1, 2019