How to give your money away – the right way
Accumulating and building wealth isn’t easy. But giving it away – that’s a piece of cake, right? Just take out your chequebook, sign on the dotted line and that’s that. Right?
Well…maybe. Sure, you could take a more spontaneous approach when it comes to giving – and many people do, particularly when the gift is small. But with more substantial gifts, the process of giving can be complex, multi-faceted and fraught with the potential for both financial consequences and emotional pitfalls – not only for you, but for those receiving the gift as well.
If your goal is to ensure that the wealth you pass on to your spouse, to your family and to the organizations and causes which you care about actually ends up being used the way you want it to be used (and with a minimum of financial and familial hassles), it makes sense to take a more structured, more strategic approach. Let’s take a look at how you can do that.
Defining your giving goals
Whether you’re planning a gift to a family member, a close friend in need or a charity that you care about, it makes sense to take a step back and reflect on several key questions.
What are you trying to achieve?
What’s the intention of your gift – what change or direct benefit are you looking to bring about with your money? With personal gifts to family, this is often an easy question to answer. But with charities and causes, it often takes a bit of thinking to determine exactly what impact you’re trying to make.
What’s the scale?
How much do you want to give? And for how long? Are you looking to support an immediate or “emergency” need (disaster relief, for example, or perhaps a child’s mortgage down payment)? Or are you looking to make a multi-year impact on a cause which you care deeply about? If you’re giving to a cause, do you intend for your gift to be used locally, nationally, or even globally?
How much do you want to be involved?
When it comes to giving, some people simply want to mail in a cheque (or these days, make an e-transfer) and have done with it. Others are looking for more engagement with the people and the causes which they support, or maybe even consultation regarding how the money should be spent. Knowing which approach you prefer will steer you toward specific strategies and options.
How will it impact your own finances?
Every gift needs to be considered in the context of your own financial situation: you don’t want to give so much that you diminish your lifestyle or derail your ability to cross items off of life’s bucket list. You’ll also want to think about whether your intended gift might limit future gifts – not an issue for smaller, one-time gifts but, for a larger gift, something worth thinking about.
Give now or give later?
By giving now, you get to see the impact of your gift on the recipient – a highly enjoyable experience for most. In addition, that gift might be better aligned to when your recipient could actually use the help (rather than waiting many years for an inheritance, for example). But giving later might be a better strategy: it can relieve pressure on your own finances, be much less onerous from a tax perspective and, if the gift is structured properly, it can magnify the impact of your giving for many times in the future.
Asking yourself these questions will help ensure that your giving is both meaningful and aligned with your broader intentions. Remember: there are no right or wrong answers to any of these questions but, if you’re having trouble answering them, it might be worth consulting with an estate-planning expert or financial professional and talking things through.
The form of your gift
After you have a rough idea of what you want your gift to achieve, it’s time to consider what form that gift might take. The following list highlights some of the more common giving options, both for giving during your lifetime and as part of your estate.
Cash gifts – self-explanatory. You take out your chequebook and start writing. Such gifts have the benefit of being an immediate, tangible benefit that’s perfectly suited to address immediate needs.
Help with regular expenses – An excellent way to give a leg up to kids and grandkids just starting out in life. For example, you may offer to pay a young graduate’s cellphone bill for a few months or to pick up the rent payment as they try to land their first “real” job. Or maybe chip in for the grandkids’ daycare expenses if your adult children are feeling financially stretched.
Targeted gifts for big-ticket items – think tuition payments, maybe a car you don’t need any more, or funding the plane tickets for the kids and grandkids to come and visit you at your winter Sunbelt getaway.
Mortgage contribution – something more and more families are doing in today’s high-priced housing market. This could be a great way to give a partial or early inheritance to adult children, providing you with the ability to make an immediate impact on your child’s life, at a time when they need it most.
Gift of financial property – in-kind gifts of securities, real estate, art and other collectibles, or even life insurance policies can be an excellent way to make a significant financial impact on family members or a charity. Be careful, though: such gifts may incur tax on any accrued gain up until the time you give it. More on that below.
Bequests in a will – a common way to give is to make it part of your estate plan. Doing so obviously eliminates the risk of a gift impacting your current lifestyle and, when you name a registered charity as the beneficiary, it usually generates a tax deduction for your estate, which can reduce tax owing on other assets.
Private foundation – an option for ultra-high-net-worth families looking to make a long-term giving commitment to causes which they care deeply about. Foundations are a complex subject, one that demands careful consideration and professional guidance, and which are best suited to gifts of $1 million or more. But they can be an excellent way to leave a lasting legacy in which your entire family can participate.
Think about how any of the above may line up with your goals and purposes as expressed above. Keep in mind that your approach can shift and evolve over time, or as your situation changes.
Crafting a giving strategy
Now that you’ve given some thought to the basic purpose of your gift, it’s time to come up with a personal giving strategy. Again, if your purpose is to provide a one-off donation to an immediate cause, then strategy might not play into it all that much. But if you intend to make a more significant gift, or for giving to become something that you do more frequently, then it makes sense to be more structured with your approach. Here’s a quick, four-point plan that can get you started.
Step 1: Create a giving budget
First, take a look at your overall financial situation and determine how much you can reasonably give. If you’re unsure about what that amount might be, now is the time to consult with a qualified financial planner or wealth advisor – this is something that you don’t want to get wrong.
Step 2: Create a timeframe
Is your gift a one-time event, or an ongoing occurrence? Thinking about your cash flow and expenses, when does it make most sense financially for you to give – and for the other party to receive a gift? Doing a little planning here can help magnify your impact, while minimizing any potential disruption to your own finances.
Step 3: Think about the “how”
As we discussed above, there are many different ways to give; choosing the right structure can help ensure that your gift is used for the purpose you intended it, while making the greatest impact on the recipient. The right kind of gift can also help you take full advantage of any tax benefits which your gift might generate – or to steer clear of any unintended tax consequences for you.
Step 4: Communicate your intentions
A surprise gift makes for great drama on TV. In reality, though, it’s usually a much wiser idea to communicate to your intended recipient before you give; doing so might help you better understand what kind of support they need. And if there’s a possibility that your gift might be contentious or raise eyebrows with close family who feel excluded from your largesse, communicating can help you avoid the “shocking surprise” which can sometimes lead to family acrimony and legal hassles.
Tax matters
If you’re wondering about what the tax implications of all this giving may be, good for you for thinking of it, because giving away substantial sums can run afoul of sometimes-confusing rules if you’re not careful to follow those rules.
Unlike our cousins to the south, there is no “gift tax” in Canada. Most of the time, receivers don’t need to report a gift as income on their tax return, as long as the gift wasn’t in exchange for any products or services. Of course, if the recipient resides in another country, or if you’re giving away assets domiciled in another country, then that country’s rules might be very different – make sure to check with a tax professional to be sure.
For the giver, however, the tax implications of giving can be more complicated. While there is technically no limit to the amount that you can give in a year (or in a lifetime), depending on what assets you give, there may be tax consequences to consider. Generally, if the gift is simply cash, then there are no tax consequences at all. But if the gift is an asset (a car which elderly parents can’t use anymore; the family cottage; a valuable painting; financial assets such as stocks and bonds; etc.), the CRA will consider the gift to be a deemed disposition and the taxman will usually want his share of any gains which you’ve accrued through the years (although there are some exceptions when giving to a spouse). Giving appreciated assets to a charity usually generates a tax deduction, which can help offset that tax, at least in part.
Giving to minor children has some very specific tax rules; if you’re thinking about it, make sure that you’re aware of these rules. Very generally, if you make a gift of an income-producing asset to a minor child (stocks or bonds, let’s say, or perhaps a rental condo), then the income from that property will usually be attributed back to you, no matter who ends up actually spending that income.
Remember, the rules covering the tax consequences of giving can easily comprise an entire book, and the points above are only the most rudimentary overview of what you need to know. But the bottom line comes down to this: don’t assume that you can simply channel cash and assets to friends and families without tax consequences. Seek out an opinion from an experienced tax professional and find out for sure.
A word about family
For the giver, the act of giving comes from a place of generosity; it’s an incredibly noble goal to donate something of yours to improve the lives of others, and it typically brings much happiness to the giver to do so. But for the receiver (or those related to them), the emotions aren’t quite so simple.
Here’s the thing: money and wealth are emotionally charged topics and giving money away can trigger unexpected reactions that can have a long-term impact on personal relationships. Gifts can sometimes create a whole host of tension and expectations, particularly if you’re gifting money to one family member and not others, or when the purpose or meaning of the gift hasn’t been communicated clearly. Gifts can also change behaviour: regular support can sometimes lead family members to expect that money regularly, which may distort financial decision-making and lead to resentment if that support changes or stops.
Ultimately, the decision to give is a very personal one, and no one but you should tell you how much to give, and to whom, and when. But before you make any gift, it’s a good idea to think a bit about how that gift might be perceived – by the recipient, as well as by those around them. If you feel that your generosity (no matter how well-intended) could lead to bad feelings, resentment or negative impact on your relationships with family, it’s wise to proceed with caution. At the very least, you’ll want to take the time to communicate to everyone about your purpose. While others may not share your views, honest, open communication gives you a better chance of preventing such differences from being the start of a permanent rift within the family.
The fact is, we expend a lot of effort learning how to accumulate and build wealth, but precious little time thinking about how best to give it away. And that’s too bad, because giving can be one of the most rewarding acts that we can take with our wealth. But it’s even more rewarding when you do it with intention and purpose. Spending a little time thinking about giving before you actually do it will make the process – and the results – much more satisfying.