DAF or Private Foundation?Considering the differences between two charitable giving vehicles
People who have dreamed of starting their own foundation, may find that their wish can been has been granted. For only $25,000, clients can set up an fund that provides the “advantages of a private foundation but with none of the administrative burdens—and at a fraction of the cost of running a typical family foundation.”
By understanding how Donor Advised Funds (DAFs) work, clients who previously limited their charity to annual giving might consider the advantages of a DAF; “and those who are struggling with the burdens of running their own private foundation may be encouraged to evaluate whether it makes sense to collapse the foundation into a DAF.
What is a DAF?
A DAF is a charitable gift fund set up with an independent public charity. Unlike a private foundation, which receives most of its funding from one donor or family, a public charity is funded by contributions from many individuals and corporations. The donors make irrevocable gifts —usually cash, securities, or mutual fund shares to their DAF. In exchange, they get a donation tax receipt and assume the role of adviser on their account. They can sometimes decide how the funds are invested and to the extent of the balance in their fund and the DAF sponsor distribution rules, and they can recommend grants to their favorite charities.
(Donors can name their fund as they wish; for example Jane Doe Family Foundation or Lawyers Against Diabetes.) They can request that a grant be made in the fund’s name or anonymously, on a onetime or a recurring basis. Their role as advisor on their fund gives them virtually all the flexibility they would have by running a private foundation but without all the administrative hassle.
Donor Advised Funds enable people of even modest means to set up a virtual private foundation.” If clients are planning to donate $1 million or more, you may be wondering why, they shouldn’t just establish their own foundation. Before you encourage them to do so, help them to understand the administrative work that running a foundation entails.
What is involved in running a private foundation?
First, they must create a legal entity (usually a trust or not-for-profit corporation). Then, application must be made to the Charities Directorate of the Canada Revenue Agency (CRA) which takes considerable resources and legal fees. To remain compliant with CRA, a foundation must distribute at least 3.5% percent of its assets every year; otherwise known as the Disbursement Quota (DQ) which is monitored through a compulsory year-end tax filing called the T-3010.
Another important consideration is privacy. The truth is that a private foundation isn’t really very private. The T-3010, “requires a foundation to list the names and addresses of officers and directors, along with details on how the endowment is invested and the name of every grant recipient and amount awarded. This return is available for public viewing and can be easily accessed through the CRA website. The donor’s personal beliefs (expressed through the political, religious, civic, and social charities chosen for funding) are exposed to the world.” In addition, board directors have the fiduciary responsibility for asset management, handling grant proposal submissions, and probably hiring of staff to keep books and records and perform grant due diligence. For some all this work makes running their own foundation a lot less glamorous.
Instead, clients can set up a DAF and still realize their charitable goals but without all these burdens. There are minimal set-up costs and annual expenses at Benefaction are limited to just 0.5 percent for charitable administration (excluding investment fees).
“The tax advantage to a DAF when donating appreciated securities, versus selling them and contributing the cash, is particularly compelling.” Since 2007, the taxable portion of the capital gain resulting from the gift of shares, rights and debt obligations traded on Canadian and certain foreign public exchanges is zero. This means that any tax from a capital gain owing from gifts of securities to charity is effectively eliminated. This change in legislation has proved to be a powerful incentive to give securities because now there are two key benefits to donors: the tax receipt which will result in a tax credit AND the donated securities are excluded from capital gains tax. Similar treatment of these tax benefits from donating listed securities was extended to private foundations in 2008, but private foundations are subject to complex excess business holdings regime rules which are essentially tests to qualify for provision.
All things considered, donor-advised funds are a very appealing vehicle for giving and their numbers are growing as people catch on to the flexibility they offer.Adapted from Take it for Granted, a CFA Magazine article published, Sept-Oct 2011.