What You Need to Know About Donor-Advised Funds

Insights Dec 10 2018
Have you chatted in your household about giving back to charity?

When the calendar year is coming to a close, the unofficial start of charitable giving season begins. It’s also a prime time to get tax-smart, and one of the best ways to do so is through charitable giving.

Many people ponder donating to charity, but what often comes as a surprise is just how tax-efficient charitable giving can be if done right…

One of the vehicles for doing so, is through donor-advised funds.

Despite their lengthy existence, donor-advised funds have grown in popularity over the past few years. If you’re not quite sure about what a donor-advised fund is, or if it might be right for you, keep reading.

A brief background on donor-advised funds

Even though donor-advised funds have just recently grown in popularity, the reality is that the use of such funds dates back to the 1930s. The New York Community Trust set up the first known donor-advised fund in 1931.

In Canada, use of the donor-advised fund didn’t come about as quickly. The Vancouver Foundation, for example, notes that their first major donor-advised fund (The Pender Fund) was created in 1963.

Hold on while I add “History Professor” to my LinkedIn profile…

Since then, the use of such funds has grown for one simple reason: donor-advised funds give the fundholder the ability to donate now and decide later which charitable organization they want to help. Why is that so important to people? The act of irrevocably gifting the money to the Charitable Fund that triggers the tax receipt, which because so many people leave this until last minute, they don’t necessarily want to rush the decision of who it should go to.

3 common routes for charitable giving

Private Foundations

A very common form of donor-advised funds is setting up a private foundation. Often, this is for the wealthy who have the resources of time, money and help to tackle all the administrative work. A well-known example of this is with the Bill & Melinda Gates Foundation as they are currently the highest-valued in the world at $50.7 billion as of December 2017.

However, you do not have to be Bill or Melinda Gates to set up a private foundation. To set up a private foundation, you do have to pay set-up fees, oversee the management of the assets, create a Board of Directors and be sure to stay compliant with CRAs rules, reporting and filing requirements.

Interestingly it is not uncommon to have a lot of these Private Foundations become dormant over a period of years. Many are also converted to a less onerous format as the excitement and lustre wears off the words “Private Foundation.”

Community Foundations

If you don’t want to go through the work of setting up your own foundation, you can give back through a community foundation.

These community foundations, such as the Vancouver Foundation, SurreyCares Community Foundation or Abbotsford Foundation, promote charitable work being done in their geographical area. They are “Umbrella Foundations” and have the ability to set up the “Endowment Fund” under their structure for you. This means you could name it something like “The Lawson Family Fund” (although you can use your own name, it does not have to be mine), and allows you every year to contribute to it either monthly, or in lump sums, which triggers you getting that coveted Charitable tax receipt. Then, at a set time each year, you (and/or your family) get to direct where you “grant” (give) to each year.

The key benefit here is that your Community Foundation takes care of all the paperwork, CRA reporting, filing, tax receipting and fund management. On top of that, there are often very low to no setup fees. You just get to do the fun stuff!

Donor-Advised Funds through your Wealth Manager

These are very similar to your Community Foundation structure and benefits. The added draw for some people is they are dealing through there Advisor and have a little more familiarity with how the will be invested.

Why Donor-Advised Funds might be right for you

Again, one of the best features of a donor-advised fund is immediate tax benefits. Who doesn’t like that?

As soon as you invest in a donor-advised fund, it triggers you getting a tax receipt that will help lessen the blow that CRA will try and inflict on your income. Canada also has very favourable tax credits for charitable giving. It depends on which province you reside in, but as an example, in BC you receive 20.06% tax savings on the first $200 of charitable donations and 43.7% on anything over that!

Another benefit of using donor-advised funds is that you can decrease your tax burden by donating securities in-kind that have a large capital gain.

If you have a stock or a mutual fund that, say, has doubled in value, and you sell it, you must pay tax on those gains. To eliminate those taxes, you can donate that security directly to your favourite charity, this is called “donating in kind”. Even better? You still get the tax credit for donating that security to your favourite charity. So, no tax on gains, and you still get a charitable tax receipt? Yes please!

A few other benefits of donor-advised funds via your Community Foundation or Wealth Advisor over a Private Foundation are:

  • More flexibility
  • Most cost efficient setup
  • No hassle administration
  • Ability to start small and grow – Most Donor-Advised Funds through your Wealth Advisor can start with as little as $25,000. Depending on the Community Foundation you may be able to start as little as $1,000 but it does not become an actual “Endowment Fund” until the $10,000 level is reached.
  • You can keep your Charitable Giving Anonymous

I always talk about donor-advised funds as a great way to teach your kids or grandkids about giving back. Start your family’s own donor-advised fund, and have the kids involved in researching who should be receiving the grants each year.  This is a legacy and gift that can be passed on from generation to generation.

This is just a high-level overview to give you a sense of the tools available to you.  Every situation is unique, so the best way to find out if a donor-advised fund is right for you is to engage your wealth advisor in a discussion about it. These discussions can be a lot of fun because they are about your passion, and who doesn’t want to figure out effective ways to leave their legacy while saving on tax at the same time?!

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