Exploring Charitable Giving: Donor Advised Funds vs. Private Foundations

Charitable giving is a significant goal for many individuals and families. Whether you're looking to support a specific cause, teach the next generation about philanthropy, or manage your charitable donations strategically, understanding the available options is crucial. Two popular vehicles for structured charitable giving are Donor Advised Funds and Private Foundations. Each has its unique features, benefits, and considerations.

 

Direct Donations and Testamentary Gifts

Before diving into Donor Advised Funds and Private Foundations, it's important to note other common methods of charitable giving:

1. Direct Donations: You can donate cash or assets (like publicly-traded securities) directly to a charity. These donations can be unrestricted or designated for specific projects.
2. Testamentary Gifts: These are gifts made through your will, designating a set amount or a portion of your estate to a charity.
3. Beneficiary Designations: Naming a charity as the beneficiary of your Tax-Free Savings Account (TFSA), Registered Retirement Income Fund (RRIF), Registered Retirement Savings Plan (RRSP), or life insurance policy. This method is beneficial as the proceeds bypass probate fees and can generate tax credits to offset estate taxes.

Donor Advised Funds

Donor Advised Funds are a flexible and cost-effective way to manage charitable giving. They allow donors to make a charitable contribution, receive an immediate tax benefit, and recommend grants from the fund over time.

 

Key Features of Donor Advised Funds:

• Minimum Contribution: The BMO Charitable Giving Program Donor Advised Funds has a minimum contribution of $25,000.
• Start-Up Costs: Typically none, as they are covered by the sponsoring charity.
• Administrative Fees: Vary with the sponsoring charity but generally around 1% for accounts under $500,000.
• Tax Benefits: Contributions generate a tax receipt at fair market value, applicable against 75% of an individual's or corporation's net income. For appreciated public securities, the taxable portion of capital gains is eliminated.
• Control: Donors can recommend grants, but the sponsoring charity has the final say.
• Privacy: Names of individual donors can generally be kept confidential.
• Succession and Governance: Donors can name advisors to recommend grants and successors for the account. Donor Advised Funds typically last one or two generations.

Private Foundations

Private Foundations are independent legal entities set up for charitable purposes. They provide donors with greater control over their charitable activities and investments but come with more responsibilities and costs.

Key Features of Private Foundations:

• Minimum Contribution: Ideal for those planning to fund a minimum of $1 million, though contributions can be made over time.
• Start-Up Costs: Range from $7,500 to $15,000, including legal fees for establishing the foundation and obtaining charitable status from the CRA.
• Administrative Fees: Typically about 1% of assets, including costs for annual tax returns, audits, and management.
• Tax Benefits: Similar to Donor Advised Funds, with tax receipts at fair market value and elimination of capital gains tax for appreciated securities.
• Control: Full control over grant-making and investment decisions, subject to regulatory restrictions.
• Privacy: Must file detailed and public tax returns.
• Governance and Succession: The ability to appoint board members, including family, allowing future generations to participate in its legacy. Private Foundations can exist in perpetuity.

Conclusion

Choosing between a DAF and a PF depends on your charitable goals, the level of control you desire, and the resources you can commit. Both options offer significant tax advantages and opportunities to make a lasting impact through strategic charitable giving.