Donor Advised Funds
James Schofield - May 11, 2023
Think of a Donor Advised Fund as a foundation minus the complexity and set up cost. This could be significantly convenient for charitably inclined individuals. Find out why.
Donor Advised funds (DAF) are a charitable giving structure growing in popularity in North America. DAFs offer several tax and logistical benefits for Canadians wising to incorporate planned giving into their financial plan.
Think of a DAF as a foundation minus the complexity and setup cost. For charitably inclined individuals and families, there are several reasons to establish a DAF. Here are a few of our favorites:
Simple In Kind Donations:
The Canadian tax payer system has established advantages for donating securities that have appreciated in value. If shares of a publicly traded company are transferred to a charity In-Kind, there is no capital gain tax payable on the disposition, and the donor still obtains a tax credit for the full value of the shares. If you were considering donating $50K worth of stock to a charity with a cost base of $25K, it would be much more tax-efficient to donate the shares In-Kind than to sell the shares and donate the cash. Donating the shares In-Kind would result in a $50K donation received by the charity and a non-refundable tax credit that can be used to reduce taxes dollar for dollar. In contrast, selling the shares first and donating the cash would result in a difference of $6,625 net to the taxpayer at the highest tax bracket. The reason DAFs are the key to this transaction is that not all charities have the infrastructure to hold marketable securities like stocks and mutual funds. With a DAF, the tax receipt is issued once the shares are deposited into the DAF, meaning the charity does not need to be able to receive shares as they will just receive the cash after the shares are sold within the DAF.
Immediate Tax Credits:
Although the donor receives the tax credit when the money is deposited into the DAF, they are not required to distribute more than 3% per year to charities. This means that donors can set aside the amount they would like to donate before settling on a recipient charity. There are several entities that rate charities on efficiency, which can be utilized in researching the charities and determining how effective they are at allocating resources to the desired mission.
Income may change from year to year because of stock options, bonuses, job changes, retirement compensation payments etc.; taxpayers who make regular contributions to one charity may not want to donate a large lump sum to that cause all at once in any given period and like the flexibility DAFs provide in accommodating this. Other reasons flexibility is important may be as simple as efficiency. Not all charities are set up to deal with an influx of cash. For instance, a gift of $200,000 to a local food bank may be difficult for that organization to manage because food can be a high turnover commodity. They likely won’t use the entire $200K to buy food all at once if they are not accustomed to having this amount available, and they may not have a sound investment policy to ensure that invested amounts can grow effectively until needed. Cash in a DAF can be invested in a variety of investments to coincide with the timelines of different goals and projects.