Take your giving to the next level: Donor advised funds

Fred inherited one million dollars. He had read my previous article on tithing and wanted to tithe on this inheritance. He wasn’t sure where he wanted it all to go, but he really wanted the tax-break this year, so he needed to make the donation this year.

Wilma had $10,000 in Telus shares that she had been given years ago as an employee. Because the shares were given to her, her cost basis was zero, meaning that when she sold the shares, the capital gain would be on the full amount. She regularly gave $10,000 per year to her church and wanted to do that again this year but didn’t have the cash so was considering selling the shares to donate the proceeds. When she discovered that she could wipe out the capital gains tax by donating the shares, she thought that made sense – but then found out that her church didn’t have a brokerage account, so she didn’t know how to proceed.

Barney’s wife, Betty, had succumbed to cancer recently. Barney felt strongly that the local hospice society had a massive impact on Betty’s quality of life during her final months, so he wanted to leave a very large sum to them in his will. But he was concerned that it would be too much all at once, so he wanted to figure out a way to give them a small amount every month for a long time.

Fred, Wilma and Barney are all terrific candidates for something called a Donor-Advised Fund (DAF). A DAF is a charity in and of itself, but one that specifically entertains advice from the donor as to where their monies should be directed. Think of them as acting like your own personal charitable foundation, like a master charity that you donate to and then distribute out of. What these funds do is act as a conduit for donors to distribute monies to their desired charity in situations such as the ones described above, taking your giving to a new level.

Donor-advised funds are available from many organizations. Some are denominational or quasi-denominational such as the Lutheran Foundation and Abundance Canada (formerly the Mennonite Foundation). Others are purely secular such as the Mackenzie Strategic Charitable Giving Foundation. Many other denominations and financial institutes have them available.

It’s important to be aware though, that money donated to a DAF, like any other donation, is an irrevocable donation. You are giving your money away and it’s no longer yours. The reason Donor-Advised Funds exist is to allow donors to advise (or to direct) the DAF as to where to distribute donations made to them; however, it’s important to deal with an organization you trust completely as they have no (and in fact are legally prevented from having any) legal obligation to later distribute your donation dollars in the way you wish. In other words, while the primary purpose of a DAF may be to distribute funds on behalf of their donors, they are not legally obliged to do so, so you are relying on their good faith to accept your instructions. Personally, I’ve dealt with a few of them and never had them even so much as hint that they wouldn’t comply with my direction, but it’s important to go in with your eyes wide open and make sure that you understand what you are getting into.

So now, Fred can make his donation this year to the DAF and get a tax receipt for the full amount this year, and then direct the DAF to distribute the funds as and when Fred sees fit. And even though Wilma’s church doesn’t have a brokerage account, she can donate the shares to a DAF and then request that they sell the shares and distribute the proceeds to her church, allowing her to benefit from the elimination of the capital gains tax. And Barney can list a DAF as a beneficiary in his will and leave instructions for 4 percent of the fund value to be donated to the hospice each year, effectively creating a perpetual income stream for the hospice.

There are other benefits as well. Rather than donating directly to a number of charities and waiting on multiple receipts, donating to a DAF and then distributing from there would simplify receipts as there would only be one from the DAF. 

Distributions can be anonymous if desired. Or not – it’s entirely up to the donor. Another very good potential benefit is that you can arrange for money inside a DAF to be invested conservatively, but that is only recommended if it is meant to be distributed over a long period of time.  Effectively a DAF creates your own personal charitable foundation without the administration and cost.

As with all things, there are drawbacks. In some cases, there may be a restriction on how much can be initially distributed. Also, while the costs are generally much less than setting up a foundation and/or much less than the tax savings of donating in-kind, there are nonetheless costs that should be taken into account.

A good adviser will have an idea of your charitable giving habits and will know if a donor-advised fund might make sense for you. But if you aren’t sure or don’t think they know how much you are giving each year or what your plans are, then ask them.  Every adviser I know wants to know more about their client’s money habits, not less.  They will be happy that you brought it up.

Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church.  He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca.  Please note that all comments are of a general nature and should not be relied upon as individual advice.  The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation.   While every attempt is made to ensure accuracy, facts and figures are not guaranteed.

Arnold is now accepting a limited number of invitations to speak for the 2020 calendar year.  If you are interested in having him speak to your congregation or other group regarding tithing and money matters, please contact us at admin@visionvest.ca or (604) 542-2818 with your preferred date and time.