May 21, 2024 | Planning Matters | 7 min read

Leith Wheeler Explainer Series: Donor Advised Funds

Leith Wheeler has engaged Canada Gives, a Canadian foundation that offers Donor Advised Funds (DAFs), to provide our clients with an effective philanthropic and tax planning tool. The following article outlines the potential benefits of the DAF structure.

Donor Advised Funds are an exciting innovation in charitable giving that offers individual donors many of the benefits of a private foundation without the same high level of time, cost, or administration – revolutionizing giving and planning.

What is Donor Advised Fund (DAF)?

A DAF is a charitable account established within a public foundation that is best explained through an example:

Mrs. Smith is selling her business to a private equity firm for $10 million. She plans to donate some of the proceeds to charity and would also like to manage the large capital gains tax bill that will be generated by the sale.

She opens a DAF account with a provider of these structures – which include community foundations across Canada and a handful of foundations that specialize in them. Once the account is open, she transfers $1 million into the DAF account and immediately receives a charitable receipt for $1 million.

As she received a tax receipt for the donation, Mrs. Smith (the “donor client”) no longer owns the assets but she is able to determine how they’re spent. She can direct what charities should receive grants from the DAF, when, in what amounts, and how she might be acknowledged (or not) in the process.

For example, she could give $100,000 a year to the Canadian Cancer Society for the next ten years and donate the remainder (from investment gains) as a lump sum in year 11. Or she could evenly split $50,000 a year among charities related to mental health, developing world initiatives, children’s health care, food security, and disabled sport programs – as long as the account has funding.

Private foundation or DAF?

In a primer on the topic, the law firm Fasken describes the differences between a private foundation and a DAF as related primarily to cost, control, and time. While a private foundation may require higher costs to set up, if the asset size is large enough, it may be more economical long term than a lower-touch, percent-of-assets fee-based DAF solution. They write it also affords the donor family more legal flexibility for succession and legacy planning of the donor and the opportunity / responsibility to get more directly involved in the operation of the charitable giving.

Given the $1 million donation size and Mrs. Smith’s preference to remain arm’s length, a DAF is probably a preferable option for her, to a private foundation. Denise Castonguay, the founder and CEO of Canada Gives, would agree. “The donor/family receives the same tax benefit when donating to either structure - and can still disburse funds to charities as they choose,” she says. “But if they choose a DAF, they do not have any legal/governance responsibilities, board of directors duties or liabilities, and do not need to spend time on administration, recordkeeping or CRA reporting.”

What are the benefits of a DAF?

Flexible tax planning. A DAF will allow the donor client to make a lump sum donation today and receive the tax receipt immediately. She can then decide with her tax advisor what of the $1 million to claim in any given year, subject to a maximum deferral period.

Figure 1 also demonstrates how donors can increase their net donation while maximizing the tax benefit from the gift, by transferring securities with embedded capital gains. (Note there are several changes to the taxation of capital gains currently being considered by the federal government, so please treat the simplified assumptions of 50% inclusion rate and 50% tax rate as just illustrations.)

Figure 1: The benefit of transferring $100,000 of in-kind securities with embedded capital gains to your DAF, versus selling and donating the cash

Minimal paperwork. One of the biggest advantages of DAFs over private foundations is the elimination of the majority of the required paperwork and reporting. No board of directors, annual meetings, reporting to CRA, up-front or ongoing legal work is required – just a 2-page application form on day one.

Control over privacy. Many donors are happy for their gift to be recognized publicly. For others, another advantage of a DAF is that – because the governing foundation makes the donation on your behalf – you have the ability to issue grants anonymously. Whether it’s modesty or a desire not to be retargeted for fundraising follow-up, this feature can prove to be a valuable one.

Help getting started. Sometimes the hardest part of charitable giving is just knowing where to start. Did you know there are more than 86,000 registered charities in Canada? We viewed consulting help as an important element of the DAF service offering when we looked at options for Leith Wheeler clients. Canada Gives offers a variety of consulting services and tools to their donor clients.

Intergenerational giving. Ms. Castonguay adds that DAFs can also be an effective way to develop your children’s understanding and appreciation of the importance of philanthropy. “Often our DAF donors want to know ‘How do I get the next generation involved?’ and we can share many different ways that have worked for other donor families,” she says. “Sometimes it is in knowing how and where their charitable dollars are going. For many, it is helping to organize their giving when there are multiple charities they wish to support.” Her organization also offers its donor clients the ability to create sub-accounts, so kids can have their own pot of money to direct and follow.

Legacy planning. While Fasken gives private foundations the edge on customized legacy planning, DAF donor clients do have the ability to determine how/when the assets are granted out after they’re gone. They can either appoint a successor to take over directing the grants upon their death, or leave a “Letter of Wishes,” which spells out how they’d like the funds depleted.

Where do you start?

For Leith Wheeler clients interested in giving through a DAF, the process is very straightforward:

  1. Consult with your portfolio manager, to discuss the pros and cons of the structure.
  2. Determine the amount you would like to donate to the DAF, likely in consultation with your tax planner. Note the minimum account size for a DAF at Canada Gives is $100,000.
  3. Sign a simple 2-page account opening document with a DAF provider like Canada Gives. This establishes the agreement between you and them. You can name your DAF at this point: “Smith Family Charitable Giving Foundation,” for example.
  4. Give direction and approval to your portfolio manager to make the donation. He/she will then sell or transfer sufficient securities in your existing account(s) to fund the donation. These proceeds are transferred to Canada Gives and held in the Smith Family Charitable Giving Foundation DAF account and a tax receipt is immediately generated.

From this point on, here are the rights and responsibilities:

You or your successor/beneficiary (the donor client): Because you have now donated them, the assets themselves are owned by Canada Gives and held in the Smith Family Charitable Giving Foundation (the DAF). You have the full ability to instruct Canada Gives to issue grants to qualified charities in Canada in the amounts and over the timing of your choosing, however, for the life of the account.

The DAF provider/Canada Gives: They administer the DAF, which includes issuing tax receipts, vetting potential grantees to ensure they are CRA-permitted and then executing your wishes and providing custom grant letters to the recipients. Canada Gives will offer consulting services to you for your giving plan, track your annual disbursements against the mandated 5% minimum, and provide reporting that shows all giving activity, progress toward long-term pledges, and more.

Your Leith Wheeler Portfolio Manager: We develop an appropriate asset mix for the DAF, which matches the liquidity needs and time horizon for your giving plan. Your Portfolio Manager will continue to oversee the investment portfolio, giving you the peace of mind of knowing the DAF assets are being managed to the same standards you have become accustomed to with Leith Wheeler.

Donor advised funds can be a simple, effective way to manage your philanthropic, financial, and family goals. Reach out to your portfolio manager or contact us at info@leithwheeler.com if you’d like to learn more.

NOTE: The information contained herein should not be treated by readers as investment, tax, or legal advice and should not be relied on as such. You should consult legal or tax professionals regarding your specific situation.

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