Charity for Life

Donor-advised funds allow people to give gifts in perpetuity. It’s like a foundation, but without the annual costs.

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There comes a time in everyone’s life when they start to think about how their money can best be put to use in their final years and after they’re gone. In the past, people would cut cheques to their favourite charities, but once that money ran out there would be nothing left to give.

Donor-advised funds make it easier for high-net-worth Canadians to set up, maintain and contribute to a private foundation-like vehicle.

The wealthiest Canadians got around that by setting up private foundations, which allowed them to invest and grow their money and then donate the capital gains or dividend income to charity. As long as the principal wasn’t depleted, those donations could be made year after year.

However, managing a private foundation takes a lot of work and money, which is why, over the last few years, financial firms have begun offering donor-advised funds. These funds make it much easier for high-net-worth Canadians to set up, maintain and contribute to a private foundation-like vehicle.

We spoke to David Ablett, Investors Group’s Director of Tax and Estate Planning, about why donor-advised funds are ideal for those who want to leave a long-lasting legacy.

The Investors Group Charitable Giving Program is offered together with the Strategic Charitable Giving Foundation, which operates independently from Investors Group. Donations are irrevocable and vest with the Foundation. This information is general in nature and not intended to be professional tax advice.  Please read the Program Guide for complete details, including fees and expenses.

David Ablett
B.Comm (Hons), is Director of Tax and Estate Planning with Investors Group

  • What is a donor-advised fund?

    It was created as an alternative to a private foundation. While foundations do allow individuals or families to direct and control how their money is allocated to different charities, the problem is that there’s a fair amount of work involved to manage it. You can also have substantial administrative, accounting and legal costs. Private foundations are out of reach for the average person.

     

    A donor-advised fund, though, is set up through a public foundation. It has all the advantages of the private foundation, but the administration, legal and accounting work is taken care of by the public entity. People don’t have to incur those costs or the time that it takes to do everything.

  • Why would someone want to set up a fund like this?

    It’s for individuals who want to make sure that there’s going to be money available every year for the use of a specific charity or a number of charities. It’s a lot like setting up an endowment. The money, though, is not going to a charity for day-to-day use. It’s being held in an investment account and, in most cases, it’s the income that’s being generated – above the principal – that gets paid out annually. It’s a way to provide a charity with a stable source of funding.

  • How much do people typically contribute?

    The minimum amount varies by company, but with our program it’s $25,000. It needs to be meaningful enough that it will be able to generate income that can then be distributed to the charity.

  • Can people earmark the funds for something specific?

    That’s not something that we do, per se. The donor would do that through the charity. Let’s say someone wanted to give a grant to a medical student with the highest marks. The donor would contribute money to the donor-advised fund (DAF), the income earned on the contribution would get paid to the university and then the university would distribute that money to the student.

  • How do charitable tax deductions work with a DAF?

    We use a public foundation called the Strategic Charitable Giving Foundation. Any donation made to that foundation would qualify for a tax receipt, just like any charitable gift. If you add more money into your DAF every year, you’ll get a receipt for that contribution.

  • Where is the money invested?

    The donation is held in an account named by the individual within the Strategic Charitable Giving Foundation. The individual can then choose one of 10 different mutual funds made available by Investors Group. Other companies that offer DAFs may not allow the person to have a say in how the money is invested.

  • As boomers start thinking about legacy, are you finding that DAFs are becoming more popular?

    They are. There was always a limited number of people who had enough money to set up a private foundation – you need at least $1-million to set one up – but the DAF makes endowment giving far more accessible. As people get older they start thinking about their legacy and what they’re going to do with their money. So a lot of individuals are setting up DAFs in order to give money in, essentially, perpetuity. People also involve family members in the grant-making decisions. They want their children or grandchildren to get involved in giving at a young age, and this arrangement helps.

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