Donor Advised Funds: A Powerful Tool for Charitable Giving
Donor Advised Funds (DAFs) have become an increasingly popular way for individuals and families to give to charitable causes. These funds provide donors with a flexible, efficient, and tax-effective way to support the causes they care about most. In this article, we will explore what DAFs are, how they work, and why they are becoming an increasingly popular choice for charitable giving.
What is a Donor Advised Fund?
Think of a DAF like a holding tank. The donor makes a donation to a foundation and receives a charitable receipt for their gift. The foundation manages the donation in a separate fund (DAF), which acts like the holding tank. Additional donations can be made to the DAF at any time and donors can recommend that distributions be made to charity from the DAF. The beauty of a DAF is that it allows donors to plan the best timing of their donation without the added pressure of knowing which causes they want to support and when.
The funds in a DAF are typically managed by a community or public foundation, and donors can donate assets including, cash, stocks, bonds, mutual funds, and possibly private company shares.
Once the donor makes the donation, the donor no longer owns the assets but can recommend when and where the foundation distributes to charity.
Why are DAFs becoming more popular?
DAFs have seen significant growth in recent years for several reasons:
- Convenience: Donors appreciate the ease and convenience of using a DAF. They can donate to the foundation at any time, manage their charitable giving, and receive reports on the fund balance.
- Philanthropic Planning: DAFs are an excellent tool for donors who want to engage in long-term philanthropic planning. Donors can involve their family members in the giving process and create a legacy of charitable giving.
- Anonymity: Individuals and private business owners often appreciate the flexibility and privacy of a DAF.
How do DAFs work?
In Canada, DAFs are offered by community and public foundations, or foundations affiliated with a financial institution. Donors who are considering establishing a DAF should consult with their professional advisors who are familiar with Canadian tax law and charitable gift planning.
DAFs offer donors several benefits, including:
- Tax Benefits: Donations added to a DAF are eligible for a charitable receipt. This can be a powerful tax planning tool for individuals who are looking to maximize their charitable contributions in a given year and offset capital gains or other taxes owing.
- Flexibility: Donors can donate a wide range of assets including cash, stocks, bonds, mutual funds, and possibly private company shares.
- Simplified Giving: DAFs offer donors an easy and efficient way to give to charitable organizations by making one donation with multiple charitable disbursements.
- Anonymity: Unlike a private foundation, DAFs offer donors greater privacy and anonymity.
How do I choose the right DAF provider?
It is important to carefully weigh your options when choosing a DAF since providers offer varying rules and restrictions including:
- Distribution restrictions to certain times of the year.
- Limits on distribution amounts.
- Limits on the number of distributions.
- Varying costs and investment option limitations.
- Varying levels of support and advice.
- Different set-up processes and requirements.
To learn more about DAFs and planned giving strategies, please contact us to connect with a gift planning consultant.