If philanthropy is a priority in your life, a gift planning structure may be a greater benefit than you think — to you and your charities of choice. Donor advised funds (DAF) can make charitable giving more strategic, meaningful and impactful.
Here’s what you need to know about this charitable giving structure.
What is a donor advised fund?
A donor advised fund is a personal charitable account established and named by an individual or family. The fund receives donations from its founder (or founders), often made both in their lifetime and by their estate. These donations are invested to provide funds for grants to charities. Donations are irrevocable and qualify for tax receipts, and the grants made from the DAF go to charities of the donor’s choice.
What’s the advantage of donating through a donor advised fund?
Why would someone establish a DAF rather than donate directly to their favourite charities? Simply, most people should continue giving to their favourite charities directly: a DAF is not a replacement for regular, annual giving. Instead, it’s a charitable structure that allows effective and efficient gifting of assets to achieve long-term philanthropic and legacy goals.
Donations to a DAF are eligible for a tax receipt, which can produce a tax savings of approximately 50%. Since the mid-1990s, Canada has introduced over 20 charitable giving incentives. These incentives encourage the donation of assets and, collectively, they have resulted in Canada having the world’s most generous donation tax system. The incentives include the exemption of capital gain on public securities and estate donations by will.
Asset donations are larger and more complex than regular cash flow donations. They need to be done prudently and with professional support to balance financial, family and personal needs. A DAF is especially helpful to donors who have a number of charitable interests and an asset that is too large to donate all at once. For many donors, a DAF is a vessel for making donations over a lifetime, which also provides time for the donor to identify and support what they consider to be the most impactful charities.
How do I set up a donor advised fund?
In Canada, DAFs are held by public foundations, which are registered charities. Each foundation has a different mission, policies and expertise. MD Financial Management (MD) works with Aqueduct Foundation, which has become a leader in Canada since it was established in 2006. Aqueduct’s mission is to “facilitate personal philanthropy,” and it’s known for its philanthropic expertise, flexibility and granting support. The foundation enables its donors to grant to any charity, in any amount, at any time whereas many public foundations benefit one or a few charities.
At Aqueduct, DAFs are often established at the time of, or in anticipation of, a major tax or life event. Here are two examples1:
1. Donor with a major tax event. Aqueduct worked with a physician who sold his practice but retained ownership of the clinic’s real estate. At year-end, he donated the $1.5 million building to Aqueduct, which offset the tax owing on the year. The following year, the building was sold by Aqueduct and the proceeds were used to create a long-term DAF so his family could provide grant to charities of their choice.
This donor is charitable, but he also faced the pressure of the tax deadline and wanted to take time to choose which charities to support. A DAF provided a good solution because it was easy, free and quick to set up. Aqueduct provided an immediate tax receipt, and the donor and his family had the flexibility to make thoughtful grants for many years to come.
2. Estate donors. Aqueduct recently worked with a retired couple to establish a legacy fund as part of their estate plan. The couple, both family physicians in their 70s, have no children. The legacy fund provided them with a way to support a number of causes that are important to them, including education, the environment and medical humanitarianism.
In particular, they have designated the residue of their $4 million estate to fund a community-based scholarship program to help students with financial need in their community to pursue post-secondary education. They also plan to donate to their fund during their lifetimes, using public securities to offset taxes and see their philanthropy in action.
These types of solutions provide tremendous flexibility in terms of charitable focus, integration with your financial and estate plan and potential for individual as well as family involvement going forward.
To explore the benefits of a DAF, please contact your MD Advisor* or MD Private Trust Company Estate and Trust Advisor to discuss a plan that meets your financial, estate and philanthropic goals.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 These examples are hypothetical and are for illustrative purposes only. They do not represent the financial situation of any actual client. Any resemblance to actual people or situations is purely coincidental.
Estate and trust services are offered through MD Private Trust Company.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.