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Family wealth becomes family values

30 December 2013

“What can I do to teach my children to manage their inheritance?”

This is an excellent question. Too often there is a reluctance to discuss financial matters with children or grandchildren. Some feel that awareness of a large inheritance may discourage a child from becoming productive and self-motivated. On the other hand, not talking about it can leave a child unprepared and can be self-defeating.

The benefits of wealth rarely come without complications and challenges. Families sometimes underestimate the emotional complexity of their wealth issues. Open communication between parents and children is critical in preparing everyone for the transfer of wealth.

The word “wealth” comes from the Middle English weal and originally included not only the concept of prosperity, but also the concepts of well-being and happiness. Thus, preparing children for a transfer of wealth should also include passing along beliefs and values: What does the wealth mean and how will it be used? When parents start sharing their values and beliefs about family wealth early, their children will be more prepared to succeed.

Involving children and grandchildren in philanthropy is an excellent way to engage family members and can be highly rewarding. Private foundations are one way of achieving this. There are more than 4,000 private foundations in Canada. A private foundation can be established to reflect a family’s values. It also allows family members to be involved in the decision-making process of which charitable organizations to support from year to year. However, setting up and maintaining a private foundation requires a significant commitment of time.

A less time-intensive option for philanthropic giving – one that is becoming more popular – is the “donor-advised fund.” Donor-advised funds are offered by community foundations such as Vancouver Foundation. You can establish this type of fund with as little as $10,000, and once it is set up, you can make annual contributions and apply the resulting donation tax credits against your income tax owed in that year. This can provide ongoing lifetime tax benefits and, on your passing, the fund can be increased from your estate.

As with a private foundation, the power of a donor-advised fund is the ability to use the investment income to support charitable organizations of your choice. Family members can help research charities that are of interest and projects that meet the family objectives. This is a wonderful opportunity for parents and children to learn from each other, and to gain perspective on what’s important to the family.

Often, you can access the grant-making expertise of a community foundation, which can provide suggestions for projects of special interest or research particular organizations or charitable activities. Community foundations can take care of all the administrative details of setting up and maintaining a fund, including arranging for payment of grants, at a very low cost.

Donor-advised funds are an excellent way to encourage succeeding generations to get involved in charitable giving. They can also be an important tool in the transfer of wealth and values for your family.

Ric Langford, LL.B, is the director of wealth planning at BMO Harris Private Banking. He has more than 25 years experience providing professional services in estates and trusts.

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