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Leveraging Donor Advised Funds for Residual Interest Gifts

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Once a donor understands the options that are available to them through a Residual Interest Gift it might also interest them to understand the benefits of leveraging a Donor Advised Fund (DAF) for this type of giving.

By combining the benefits of a Charitable Remainder Trust (CRT) with a DAF, sponsored by Gift Funds Canada, a donor can achieve greater long-term flexibility and have the potential of creating a legacy gift fund for future generations. A DAF also allows a donor to easily adjust recommended grant recipients over time without incurring costs for amending the trust. In most cases, CRT’s are prohibited from modifying the benefitting charity, but a DAF doesn’t have these restrictions.

If a donor is planning on gifting an investable asset to a CRT such as cash, publicly traded securities, registered retirement plans or an income producing property, the donor will receive income for life or some other specified term. If the donation is a non-financial asset, such as personal use real estate or artwork, the donor or named beneficiary will have use of the asset for a specified term – usually life.

A Charitable Remainder Trust (CRT) is an irrevocable trust that generates a potential income stream for the donor or other beneficiaries, with the remainder of the donated assets going to charity or foundation of their choice. A donor can establish a CRT with the help of a qualified legal professional and must identify their preferred charity or foundation as the beneficiary from the outset.

Let’s take a closer look at the benefits of leveraging a DAF. When a donor chooses to have a DAF be the recipient of their gift, the donor would name a trusted, qualified charity or foundation such as Gift Funds Canada, as the beneficiary of the trust at the time the CRT is established. Gift Funds Canada will open a DAF for the donor and issue an immediate donation receipt to the donor, if appropriate, the value of which will be estimated based on the present value of the residual interest of the trust’s assets at the time of the donor’s death. In accordance with the donor’s wishes and based on the chosen DAF program, a specific charity or charities may be named as grant recipients or the DAF can be leveraged to undertake an annual grant making program over time. This enables the donor to leave a lasting philanthropic legacy. Any gains or appreciation of assets held by Gift Funds Canada within the DAF over time will be received tax-free.

A DAF can also benefit a donor who wishes to make a residual interest gift. In this case, the donor contributes the asset to Gift Funds Canada, but retains the use of the asset for a specified term, which is usually life. Gift Funds Canada will open a DAF according to the information provided by the donor and issue an immediate donation receipt based on the present value of the residual interest of the gifted asset. The DAF will go on to be managed in accordance with the donor’s written directions and based on the DAF program that was chosen. In this case as well, any gains or appreciation of the assets held by Gift Funds Canada within the DAF will be tax-free.

Tax considerations can be a key point for donors. In the case of a residual interest gift there is the possibility that assets transferred to the trust may have unrealized capital gains which may trigger capital gains consequences upon transfer. If the trust holds investment assets, the donor will likely have to pay tax on income realized by the trust each year.

With good planning, the tax benefits of the donation receipt may offset the tax liabilities triggered by the transactions. A professional advisor like Gift Funds Canada can assist donors with this type of giving strategy and help them realize their philanthropic goals.