Experts have advised the use of donor-advised funds, but there are still compelling reasons to choose the other option
Some say that being charitable means giving until it hurts. Saying that, an advisor whose client has their eye on philanthropy should present options to maximize the impact and minimize the pain involved. In the field of charitable giving, there are two major alternatives: donor-advised funds (DAFs) and private foundations (PFs).
“While attorneys and advisors 10 or 20 years ago felt that clients should perhaps consider PFs if they would initially fund them with $1 million, $5 million or $10 million, today most advisors indicate that a client shouldn’t begin to contemplate a PF unless he would fund it with at least $10 million, $20 million or $50 million,” wrote Ken Nopar, senior philanthropic advisor for the American Endowment Foundation donor-advised fund, in an article for WealthManagement.com.
That shift in convention came with the arrival of DAFs, through which donors can accomplish their charitable goals for significantly less financial and practical cost. According to Nopar, these include, among others:
- Minimal annual fees for DAFs, compared to PFs with high maintenance costs;
- A days-long timeframe to open DAFs, compared to PFs which can take months;
- DAF donors have the option to stay anonymous, while all PF grants are publicly visible;
- DAF sponsors handle all grant administration, whereas PFs must take care of their own; and
- The absence of minimum annual distributions for DAFs, compared to a 5% minimum for PFs.
In Canada, establishing a DAF involves choosing a foundation to donate money to — which must also be registered as a charity with the Canada Revenue Agency (CRA) — that can issue the client a tax receipt for the initial amount. The money is then invested and gains are sheltered from tax; the client will specify where grants from the funds are made.
Those considering DAFs can approach foundations like the Ottawa Community Foundation, which allows donors to establish a named fund with as little as $5,000. They can also offer people advice based on the causes they want to support.
“That knowledge that we bring to the table is really valuable to donors who want to know they are doing something, but they're not quite sure how to go about doing it,” said Bibi Patel, vice-president at the Ottawa Community Foundation, in a report by Global News.
Despite the benefits of DAFs, Nopar said, some donors may still prefer PFs, which provide a more structured way of giving. Aside from the perceived status of having a PF, those who choose that option may also want more control over their investment options. For some, the desire for control trumps any possible concerns over regulations, requirements, responsibilities, and the millions they have to muster to make it worthwhile.
“Clients are best served when their advisors discuss their charitable goals,” Nopar said. “They can help determine their clients’ desire for simplicity or tolerance of complexity, the time frame for giving, who’ll be involved, how much clients want to invest in a structure for their giving and why they want or need a charitable vehicle.”
