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Financial Freedom Is Merely Organized Common Sense
Is Your Favourite Charity In Trouble? Yet?
Charitable giving is a changing field
The Rideau Hall Foundation published a report on charitable giving in Canada. It covers changes in the past 30 years. You can find the press release here.
The point is clear.
Charities that rely on regular cash donations will be in trouble.
- Demographics are working against them. People over age 70 account for 30% of all donations. That’s more than double what you expect given their share of the population. Who replaces them?
- Population growth is, in large part, from immigration. It appears that the average immigrant is a little more generous than the average Canadian, but their donations are not made to the same kinds of charities. If your charity is not a church, social advancement organization, or a hospital, you will be affected.
- Young people seem not to have gotten the memo. If they have, they don’t seem to have connected to their daily budget. Outreach might help.
- About one in five persons claims a deduction on their tax return. That is about a third less than 30 years ago. On the plus side, the average donation doubled. Could be from the aging factor.
It is competitive.
According to Imagine Canada’s Sector Source material, there are 170,000 non-profit organizations in Canada, of which 85,000 are registered charities for purposes of the income tax act.
If all donations were equally divided, it comes to about $8,200 per charity. The big ones get the most. Some get near nothing. Averages mean nothing here.
Fundraising costs are becoming a substantial sum and many people have trouble donating to a charity with high non-charitable expense amounts.
The charities must act to survive.
To paraphrase W. Edwards Deming:
Change is not compulsory, but then neither is survival.
Charities must approach the problem as TV detective lieutenant Columbo approached a crime.
The Columbo approach.
All crime solving begins with an assessment of who is a suspect. The approach to donors is similar. The parameters are
- Motive
- Means
- Opportunity
Motive
Charities frequently assume the people know what they do. Worse they assume people know why what they do is important and efficiently carried out. Begin the discussion with your value proposition. You must not assume anyone else knows. A potential donor with knowledge and a personal reason to connect will be motivated.
Motivated donors have a connection to your cause. It may be something they value and would do themselves but for other commitments and absent skills. Charities allow specialization. The donor works at their specialty and donates money to those with skills in providing the charitable service.
Means
While poor people give with their heart and their donation is meaningful to them and to the charity, it is important to find the few people who can make a donation big enough to change the fabric of the charity.
If regular donations, are the important part, the charity is likely to face problems. Better to derive their necessary resources from investment income. That can only happen with capital donations. “Planned Giving” is the normal descriptor.
Planned giving provides the opportunity to become a “perpetual donor.” $100,000 invested at 4% provides the charity with $4,000 annually and I can assure you finding a donor for $4,000 per year is not child’s play. Those over 70 donors, are not going to be around forever and the evidence that says someone else will replace them is thin.
Opportunity
People like to help and to give significant money to a charity that deals with problems the person cares about is gratifying. Not knowing how to go about it, is a serious impediment to the charity’s goal.
None of the techniques are things they will dream up while driving to work. Make it easy for them to understand the purpose of their gift and show them optional methods to achieve the donation.
Methods
It is about context. What would be a perfect solution for one person is wrong for another. The answer will involve several factors:
- Assets available.
- Income needed now and in the future
- Tax position now and in the future
- Estate needs and preferences
- A margin for error in the estimates (Security)
You will notice in this how rest of life planning and estate distribution planning are the same problem/opportunity. Try not to isolate the spaces.
A common solution using life insurance.
John and Mary are each 70. They would like to leave their favoured charity or charities $250,000 upon their death. Until then, they will continue their normal annual donations.
They arrange a second to die life insurance policy that contracts to pay $250,000 to the charity when the second of them passes. The premium is about $8,000 annually. A little over half of what John would pay for the same policy on his life alone. About 70% of what Mary would pay.
They have two choices as to how to structure the arrangement.
- Have the estate pay the $250,000 to the charity and claim tax relief. Out of estate cost will be about $125,000.
- Make the charity the owner and deduct the premiums they pay along the way. Out of pocket cost then would be in the $4,000 range after taxes each year.
The question is how long at $4,000 per year would it take to accumulate the $125,000 the estate would save? Life expectancy jointly is about 20 years. Answer about 9% pretax for 20 years. More if you don’t get the 20 years. Nearly 20% pretax if you only have 15 years. Not so many of those investments around just now.
A not so common solution.
Donate existing insurance policies. Some corporations are finding they have surplus coverages as partners retire. Cancelling them may provide a useful amount. Valuing the policies and donating them at fair value may turn out better.
The charity’s mission
- Establish your value proposition. Why would someone want to partner with you?
- Develop an inventory of methods. There are many.
- Find some suspects
- Connect
It won’t happen quickly, but it will happen sooner if you start sooner.
I help business owners and others to use tax efficiencies and design advantages to achieve more efficient income and larger, more liquid estates.
In previous careers, I have been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
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