One of wealth’s great blessings is the ability to give back to the world. Making a charitable contribution to a cause you care deeply about is a way of putting wealth to work in the noblest way possible: to make the world a better place.
No matter how noble it may be, however, a charitable gift is still a financial transaction. As such, it’s a good idea to consider it carefully and be sure that the structure of the gift makes good financial and charitable sense.
One of the most innovative, flexible and, ultimately, efficient ways for high-net-worth business owners to give is to establish a charitable foundation, either through their will or prior to their passing away.
At its most basic, a charitable foundation is a separate legal entity that exists to make donations to registered charities. After registering the foundation with the government and obtaining the proper approval, the donor makes an irrevocable donation of funds to the foundation. These funds form the pool of capital from which the foundation will make donations to chosen causes. As long as the foundation obeys the rules governing foundations, the pool of capital can grow tax free within the foundation.
A private foundation has several benefits, including:
Control over bequests. Foundations provide unprecedented control over donations. With a foundation, you retain control over how your bequests are distributed, and when. That allows for a timely response to changing charitable interests, one that could theoretically continue even after death.
Control over assets. Though a foundation requires you to relinquish ownership of assets, it allows you to retain control over how those assets should be managed. This allows for greater flexibility and the potential to increase the size of foundation assets far beyond the original bequest.
Privacy. A foundation offers a level of anonymity that’s hard to beat. Unlike a testamentary trust or other bequest made in a will, the creation of a foundation does not become a matter of public record.
Publicity. Alternatively, a foundation is an excellent way to raise a family’s stature in the community. Establishing a named foundation is one way to ensure your family’s legacy will be known for many years.
Ability to target specific organizations. A foundation allows high-net-worth business owners to target specific charities and causes, including smaller, more local organizations that might have otherwise been unnoticed by larger philanthropic efforts. That’s not always possible with other forms of giving.
Longevity. Managed properly, a foundation allows individuals to extend their giving well beyond the span of their own lives. Some of the largest and best-known foundations in Canada and the U.S. are well over 50 years old.
Family participation. A foundation is an excellent way to foster a culture of giving in your family. Children and grandchildren can easily participate in foundation activities and can be called upon to decide what causes to support.
Tax efficiency. In addition to the benefits of making a charitable donation, foundations allow for the tax-free compounding of investments within them. This makes for an extremely tax-efficient method of giving that maximizes the benefit of your charitable dollars over time.
Despite these benefits, establishing a foundation can be a complex tax and legal process. Before you make your contribution, make sure to consult with a financial professional and review your options thoroughly. That way, you can be sure you’re making a decision that’s right for you and for the cause you care about.