Giving the Smart Way: Donor Advised Funds

A Growing Trend in Charitable Giving Right Now

Affluent individuals are often major benefactors for various charities and non-profits; this is often motivated by philanthropic ideals, but can also provide helpful tax incentives. When it comes to sizeable charitable donations, though, many of these donors are unaware that there are options for how these donations are done—and an option receiving renewed interest from many donors is the Donor Advised Fund.

Typically, Canadians believe that charitable donations take place in two forms:

  • They make monthly or annual donations to charities of their choice;
  • For the ultra-high net worth, they establish a Family Foundation.

What many Canadians do not know is that there’s a third option called a Donor Advised Fund “DAF” which aims to offer many of the benefits of a Family Foundation but without the administrative burden and high costs associated with traditional Family Foundations.

Why am I hearing so much about Donor Advised Funds?

DAF’s have been around for decades in Canada, but recent data provided by Investor Economics shows that there was an increase of 35% of the number of DAFs established between 2016 and 2018. According to their research, the value of DAFs in Canada are projected to grow to $10 billion by 2026. DAF’s are generally used by affluent individuals or families in Canada who are looking for flexibility on various levels of a formal foundation but may not have the interest in establishing a private foundation.

What are Donor Advised Funds (DAFs)?

A Donor Advised Fund is a singular fund for philanthropic giving; it permits donors to make a charitable contribution to their chosen charities via the Fund as frequently as they desire, in increments to each in various proportions depending on the donor’s desire or the charities’ needs.

A DAF is a charitable fund setup within an independent registered charity and can be setup by an individual, couple or family for tax efficient charitable giving. DAFs provide a charitable giving solution that allows you to make a lasting gift without the burden of all the administrative obligations. Donors can name their fund as they wish (ie. “the Smith Family Foundation”) but a DAF offers a lower cost alternative to setting up and managing a private family foundation. What’s more, a DAF can be created during a person’s lifetime or as part of an estate plan.

Advantages of Donor Advised Funds

Tax savings. The donations are irrevocable charitable contributions and may result in tax credits in the year they are made, or they may be carried forward for up to five years. A donation of publicly traded securities offers an additional tax incentive, as the donated securities would be exempt from capital gains tax.

  • Control. Donors can decide on a year by year basis which charities they would like grants distributed to. As long as the charity is a registered charity within Canada, you make the decision on your annual giving wishes and not a 3rd party advisory board.
  • Efficiency. Donors may achieve similar objectives as private foundations, but at a substantially lower cost, with less complexity and no administrative hassle.
  • Managing Donations & Administration: Issuing official tax receipts, bookkeeping, issuing cheques to the charities of your choice.
  • Direct donation. The DAF supports charitable organizations with grants, providing them with a source of revenue to support their activities.
  • Flexibility. The charity recommendations can be changed at any time.
  • Lasting legacy. Donors can name the DAF as they wish and recommend all charitable donations through one vehicle tailored to reflect the family’s philanthropic goals and values. Donations can be made to the Foundation’s DAF by the founder, his or her family members and others. Donors can name successor advisors, ensuring future generations have the opportunity to participate in the tradition of continued philanthropy.
  • No estate taxes. Assets donated to the Foundation are no longer part of the donor’s estate and, therefore, are not subject to probate.
  • Online portal for donations: Family, friends and members of your community can donate to your fund by visiting your dedicated website where tax receipts are automatically generated for donors.

What is IP Private Wealth?

IP Private Wealth is a Family Office—a team of wealth advisors that operates as a round-table board of advisors. Our 360° approach to examining your goals, wealth, and future needs is what makes us the first and only choice of family office for our clients. If you’ve been looking for a way to manage your wealth more effectively, reach out to us.

A Donor Advised Fund in Action: Case Study of Mrs Smith

It was in 2016 when we met with a recently widowed client; as we were completing a comprehensive Estate Plan through our IP 360 process, Mrs ‘Smith’ mentioned that she wanted her current $3M estate to be equally divided in two parts; one half to her family and the other half to five specific charities.

As we started discussing the specific charities that were important to her and her late husband, it became clear that some organizations would have the capacity to govern a large gift on her death, however there were others (her local church in rural Ontario) that would likely not have the expertise or experience to manage a one-time gift of the magnitude Mrs Smith wanted to donate.

After meeting as a team with Mrs Smith’s accountant and lawyer, we updated her will to reflect her wishes while creating a Donor Advised Fund (DAF). It was decided that the DAF provided five specific benefits to Mrs Smith’s wishes:

  • Governance: Each charity’s grant would be disbursed over 20 years and not in one lump sum which would reduce concerns of the lack of expertise or experience within the smaller charitable organizations.
  • Created a lasting legacy: For 20 years upon her death, five specific charities would receive an annual gift. We named their fund the Mr & Mrs Smith Charitable Foundation.
  • Hybrid Approach: As she donated $10,000 / year to various charities, we established the fund in 2016 with an initial funding amount of $100,000. While Mrs Smith is alive, the Foundation will disburse $10,000 annually to the charities of her choice and then on death, 50% of her overall estate ($1.5M in today’s dollars) would be added to the Foundation.
  • Tax Planning: We looked through every investment holding Mrs Smith held in her investment portfolio and strategically donated investments “in-kind” which had the largest unrealized capital gains. There are two tax benefits to this strategy where one avoids paying tax on the capital gain when donated to a registered charity but also receives a tax receipt for the full market value of the donation, making this strategy very tax effective.
  • Ease of Administration: Based on the net worth of Mrs Smith, creating a formal Family Foundation was an option. However, when we examined the legal costs, administrative duties and ongoing filings required with CRA, it was decided that a family fund within a DAF provided Mrs Smith with the control and benefits of having their own Foundation, without the complexities and costs of creating a formal foundation.

We’re now five years into the creation of Mrs Smith’s DAF, and we look forward to our annual meeting where Mrs Smith advises us on the amounts to send to each of her charities. At 91 years old, it’s wonderful to watch Mrs Smith managing her donations that we’re certain will leave a lasting legacy in her and her husband’s name.

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David Bourada, CIM®

David Bourada, Senior Wealth Advisor at IP Private Wealth has been assisting incorporated physicians and their families for over 13 years. David’s passion and purpose is to be the “Financial Quarterback” for his clients by coordinating their financial, tax, cash flow, risk management and estate planning needs through the IP360 Approach. David has authored “The Physician’s Guide to Personal Finance and Investing” and has been a guest speaker at The Ottawa Hospital on numerous occasions.