Wealthy people are increasingly looking for an efficient and effective way to carry out their charitable giving goals – a Donor Advised Fund (‘DAF’) is a simplified option for high-net-worth clients to consider as they become increasingly popular for their many advantages, including being an easier, faster, and less expensive option since the sponsoring public foundation handles all administrative, operating and governance matters.
In essence, a DAF is a giving account established under a public foundation that allows donors to make a charitable contribution, receive an immediate tax deduction and support charities now and into the future for a lasting legacy. Although the donor no longer owns the donated assets, they retain the ability to advise on how the funds are distributed to registered charities or to remain anonymous.
These selling factors, among other reasons, including a heightened awareness of DAFs among advisors, have led to an influx in referrals from investment counselling firms and in DAFs becoming the popular choice for those looking to establish a charitable giving programme:
Once you establish a DAF with a public foundation and donate to it, you receive the tax receipt for the year the donation was made for an immediate tax deduction. The money can be distributed by the foundation to charities at any point in the future. You can also contribute a wide range of appreciated assets, including securities (e.g. stocks, bonds, mutual funds, restricted stock, stock options), privately held business interests, alternative asset classes and other eligible assets.
The ability to make in-kind contributions can create a valuable tax deduction for highly appreciated assets. Most importantly, it allows you to increase the dollar value of the donation by eliminating the tax on embedded capital gains.
When you become a donor to a DAF, you retain control over when and where to make charitable donations and can donate all at once or over time. You can name your DAF anything you would like, as well as design a Legacy Plan to determine how the assets in your DAF will be donated to charities beyond your lifetime, which may include appointing successors or charitable beneficiaries. Donations made to charities through a DAF can also be anonymous, unlike with private foundations.
A DAF can become a key strategy in your estate planning. When we discuss estate strategies with clients, we discuss using the DAF as a recipient of a gift from the estate. Doing so can provide long-term funding to your preferred causes and create a long-term legacy for your family. Designating your DAF as a beneficiary of the estate will allow heirs to keep supporting charities beyond your lifetime.
Invest DAF assets for growth
The assets in a DAF can be invested in a strategic asset allocation for growth. The Canada Revenue Agency requires a minimum annual disbursement of five per cent from registered charities. Any investment growth in a DAF is tax-free, which gives you the potential to provide more funding to your preferred charities.
Despite all the advantages, DAFs have disadvantages as well. A DAF is typically more advantageous for high-income families or those with a large asset base, as contributions made to a DAF are irrevocable and work as if the money has already been donated. DAFs are also sometimes criticized by charitable organizations for their ability to delay giving larger gifts to charities when the funds are available. Lastly, the funds in a DAF belong to the sponsoring public foundation rather than the donor. A comprehensive conversation with your advisor will highlight the benefits or drawbacks of a DAF.
Ultimately, whether or not to set up a DAF as a personalized charitable giving strategy comes down to individual needs and preferences, with some better suited to donate funds directly to charitable organizations or set up a private foundation. Even so, understanding how a DAF works is useful in making informed decisions, especially as they become increasingly popular with donors, advisors and investment counselling firms.
Anthony Messina is the President of Guardian Partners Inc., and Head of Private Wealth and Managing Director for Guardian Capital Advisors LP. Both entities are affiliates and subsidiaries of Guardian Capital Group Limited, a publicly traded firm listed on the Toronto Stock Exchange.
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