A legacy without the hassle

National Post

2008-03-15


Thinking about starting your own private foundation? Be prepared -- the costs and legal and accounting headaches may not be worth your while unless you have significant sums -- millions! -- to donate.

To begin with, you'll need a board of directors, investment professionals and a crack legal and accounting team to incorporate your foundation, get it registered with the Canada Revenue Agency and prepare the necessary annual filings.

Luckily, there's a simple solution that is fast becoming a more popular option in Canada -- donor advised funds (DAFs).

DAFs essentially piggyback on public foundations, such as community foundations or foundations established by some of the major financial institutions or investment management firms, by permitting you to create a "mini-foundation" as a subset of the larger, public foundation.

How do DAFs work?

You start by making a donation to your DAF. The minimum required donation varies by foundation but is typically at least $10,000 and often higher.

You can give cash or assets, keeping in mind the significant tax advantage associated with donating appreciated securities -- any accrued capital gains tax liability is completely eliminated with an "in-kind" donation.

Whether you donate cash or property, you get an immediate tax receipt equal to the fair market value of your gift.

But here's the beauty of the DAF: Just because you get the tax benefit today doesn't mean that the entire amount you donate has to immediately go to a registered charity. The funds can grow inside the DAF tax-free and each year you can "recommend" distributions to be made from your DAF to registered charities of your choice.

While technically the foundation's board has the final say, most foundations will follow your instructions.

The funds inside your DAF are pooled together with all other donors' funds and are invested by professional money managers who, due to the scale and their expertise, are able to provide a superior investment return at a lower fee than you might otherwise pay if it was your own assets invested in a private foundation.

These enhanced returns can provide increased donations from your DAF in future years.

Perhaps the biggest advantage, however, is that as a donor, you don't have to worry about any administrative details or record keeping.

The foundation will process your donation requests and transfer the funds to the charities you choose, as well as track your DAF and provide you with regular updates on the foundation's performance.

While foundations do charge an overhead fee for this service (typically ranging from 0.5% to 1.5%), that fee can be a lot lower than it would cost to do the administration on your own through a private foundation.

Most DAFs will allow you to name your fund on behalf of yourself, a family member or other loved one. As well, you can often appoint your kids, for example, as successors, so that they can continue to manage your DAF after you're gone.

This allows you to continue that legacy without the costs or hassles of establishing your own private foundation.