Many of us consider wealth and estate planning as a way to ensure that our family is well taken care of — but with the right plan in place, your money can also go towards causes that are important to you. Having the ability to leave the world just a little bit better is a powerful and very attainable goal, no matter how much money you’re leaving behind.
Lydia Potocnik, Head of Estate Planning & Philanthropic Advisory Services with BMO, has spent decades working in the field, and uses her expertise to help guide families through the opportunities and strategies that exist to create a legacy that’s meaningful and lasting, with an impact that carries on through generations. She believes that aligning your estate with your personal values and beliefs is an important wealth planning priority.
If you’d like to support your charitable values beyond your lifetime — passing the torch to the next generation, so to speak — establishing a trust or private foundation allows you to do just that. We asked Lydia to share her advice on getting started.
Let’s start with a high-level understanding of estate planning. What is the difference between a will and a trust and how do you know when each is needed?
Both wills and trusts are useful estate planning tools that serve different purposes. One main difference is that a will is a legal document that directs who will receive your property at death and appoints a legal representative to carry out your wishes. By contrast, a trust can be used to begin distributing property — which can include cash, investments, artwork, real estate, and more — before death, at death, or afterwards. It is a legal arrangement through which one person who’s called a trustee, which can be a family member, a friend, or a trust company, holds legal title to property for another person who’s called a beneficiary. Depending on who your beneficiaries are and what their financial needs are, most of the time people will create a will that has a trust within it.
When would someone typically establish a trust?
One reason a person would want to establish a trust is to provide for children under the age of majority — which is 18 or 19 in Canada, depending on the province you live in — by providing a monthly or annual income. Trusts are also often created to protect the assets a person wishes to leave to someone with special needs to cover medication, medical expenses, or a monthly allowance for example. They can also provide for flexible distribution of assets to beneficiaries who are unable to effectively manage money or can’t be relied on to make sound financial decisions. It’s worth noting that trusts also offer greater privacy than wills because they don’t go through probate and therefore there would not be any public disclosure. In order to determine the best type of trust for your estate goals, consider the age of your beneficiaries, their financial needs, and their ability to manage their inheritance.
Beyond providing for their families, many people establish trusts to ensure their philanthropic goals are carried out after they’re gone. How does someone go about setting that into action?
Typically, a trust will be in the form of a written, legal document. To set the process in motion it’s best to meet with an estate planning lawyer who will help draft the terms of the trust. While a trust can be used to benefit individual family members, it can also be used to benefit a charity or several charities. To do this, many clients create a private foundation, set up as a trust structure with a trustee managing the money for various charitable organizations. In this format, the charities will get a set amount of money paid out to them each year from the trust.
Is there a benefit to setting things up this way, rather than just making a large one-time donation to a charity or charities of your choice?
Most of the time people create a charitable trust or a private foundation as a trust structure because they want to create a legacy and ensure that some of the causes that are important to them when they’re alive will continue on when they’re no longer here. Think of it as a formal structure to give meaning to their wealth.
A private foundation is established and operated exclusively for charitable giving purposes and can be structured as a trust or a non-share capital corporation. The individual will often be the trustee themselves while they’re still alive and will determine which charities will receive a grant each year and how it will be used. Before the individual passes away, they can appoint another trustee to step in and carry out the terms of the trust and ensure that the trust deed appoints an alternate trustee. In doing so, the charities will continue to receive a financial benefit year after year.
For many, the desire to pass along charitable beliefs and values to their children and grandchildren is important. How can a trust be used to accomplish this?
Establishing a charitable trust or private foundation is a wonderful way to pass on philanthropic values to the next generation. Most of the time, if a trust is created today by parents or grandparents, they will appoint their children or grandchildren to be successor trustees. That way, the family values and the vision to support certain causes — whether it be the environment, mental health, or supporting marginalized groups, for example — will be carried on through future generations with the trust.
How does the trust work so that there’s always money available to give?
Typically, the money in the trust will be invested by a professional. Someone like a family member can invest the assets, but if you have a professional investment advisor one of the goals may be to grow the capital by investing it prudently and then disperse the annual income. If it’s a private foundation set up as a trust you do have to disperse 3.5% every year to charities in Canada. So, the goal is to make sure you’re generating at least that much income to meet the minimum annual disbursement requirement
How do families decide on which causes to support and do they have to give to the same charities every year?
To help families through the process, we encourage them to meet as a group and establish a mission statement for their trust or foundation. We guide them through this process by finding out what is important to them as a family and what has impacted their lives. For example, if someone in the family has been impacted by mental health, they may choose to support mental health projects in their community. Families often accept proposals from various charities and then decide as a group which proposals they want to fund with the revenue generated by the trust or foundation. This can change. Often a family will support a specific charity for five years or so, and after that time they’ll reassess whether they want to continue to make grants to that sector or revise and update their mission statement and support another sector.
How important is planning and goal setting when it comes to estate planning and establishing philanthropic aspirations?
For women who want to make a meaningful impact in their community, the first step is setting goals around what kind of impact you want to make and factor in your own values and what’s important to you. The second step is to meet with a wealth advisor and put a wealth plan in place.
The wealth plan looks at everything from retirement needs, to tax planning, estate planning, business succession planning, and philanthropic planning. It allows a woman to assess how much money she has today and ask herself: can I afford to start taking a more strategic approach to my philanthropy today or do I need to hold off until I retire, or does it have to happen through my estate plan when I pass away?
A wealth plan also allows a woman to make a thoughtful decision around philanthropy and what tools she’ll use to meet her goals. You can’t make any decisions until you understand how much wealth you have, who are the other beneficiaries you want to leave money to, and what are your own personal financial needs. It’s important to note that most trusts are irrevocable, so once you transfer assets to a trust, you can’t get that property back out. Therefore, consulting with a tax and legal professional is critical to ensuring that a trust is appropriate based on your own unique personal circumstances.