Donor Advised Funds Versus Private Foundations
It was not long ago that establishing a private foundation was the norm for donors who had financial means and wanted to structure a legacy of giving. However, the rise of Donor Advised Funds (DAF) has provided donors and their financial advisors with more options to discuss.
Understanding the differences between a donor advised fund and a private foundation is a good starting point for both a financial advisor and their client, and helpful to begin philanthropic planning. Each giving option can be an effective and unique method for enabling donors to make a lasting impact on a charitable cause that is meaningful to them, while also achieving their philanthropic goals.
To help assist conversations between financial advisors and their clients, the following provides some key differences between a donor advised fund and starting a private foundation. Although not an exhaustive list, this is a good starting point to enable informed conversations and to help future planning.
A Donor Advised Fund (DAF) is a charitable giving vehicle established at an organization recognized by the Canada Revenue Agency (CRA) as a charity. It enables donors to make a charitable contribution without specifying the charities that will ultimately benefit from their gift right away and the funds can grow tax-free. The donor receives an immediate donation receipt and can recommend grants from the fund to their preferred organizations and causes over time.
A private foundation is commonly a personal or family choice and are often recommend to high net worth individuals as a practical means of marrying tax planning with philanthropic interests. They are often administered by professional advisors but the fiduciary and public responsibility for everything done in the foundation’s name is the responsibility of the donor.
What’s involved with getting started
Starting a private foundation can be costly. A professional advisor can inform a donor of the start-up costs such as administrative overhead and other financial requirements to effectively manage the endowment fund. Donors will also need to engage legal services, make considerations for trustees, board members, staffing and apply to the Canadian Revenue Agency (CRA) for a registration number. Once established, the fiduciary responsibility to ensure that the funds are managed prudently and that you are complying with CRA guidelines is the responsibility of the donor.
On the other hand, setting up a donor-advised fund can be straightforward with the assistance of highly experienced professionals at a reputable charitable foundation, such as Gifts Funds Canada. The donor would open an account, name it as they would name a private foundation, make contributions and the money grows tax exempt.
A donor advised fund offers similar benefits as a private charitable foundation without the operating and overhead costs. This means more of the gift capital can go directly toward doing charitable work without having to divert funds to cover operating costs or deal with the administrative headaches. In many cases, a donor advised fund can be established with just $10,000.
Granting control and flexibility
One of the more appealing aspects of private foundations is having control over when and where grants are made, within CRA rules and regulations. Private foundations do have certain requirements such a required level of annual charitable distributions and the donor assumes all fiduciary responsibility.
For many donors, one of the most appealing attributes of a donor advised fund is, as the name implies, the donor can advise which causes will receive their support and when that support will be granted. Once the donor has decided on a recipient, the foundation managing the DAF, such as Gift Funds Canada, will confirm the recipient is qualified to receive the grant and ensure the funds are directed to the specified purpose. Unlike a private foundation, there is no legal minimum grant making requirement from a donor advised fund. This gives the donor the freedom to support the causes that are closest to them now and make adjustment to the causes they may wish to support over time.
Transparency and anonymity
Donors wishing to give anonymously are best served to give through a donor advised fund where they can make donations with complete anonymity. When a grant is made through a donor advised fund, the donor has the option of being anonymous to the recipient charity.
On the other hand, private foundations are required to produce the same public reporting as other registered organizations. This includes financial information, board members, trustees, and grants made. Therefore, donors to private foundations do not have the option of remaining anonymous, and donors should be aware that private foundation grant payments are a matter of public record.
Depending on the donor’s situation and charitable goals, establishing a private foundation or a donor advised fund will offer unique benefits to the donor. Beginning the conversation between the financial advisor and their client to understand the pros and cons of each giving tool is a good first step toward establishing a legacy of charitable giving.