Donor advised funds: Flexible philanthropy

Donor advised funds have come a long way as an efficient charitable giving vehicle. Particularly in Canada, it is a gift planning tool of choice for those who don’t wish to make direct donations to charities.

“It’s essentially a segregated fund within a public foundation or charitable organization,” said Joshua Thorne, manager, philanthropic advisory services, Scotia Private Client Group, speaking at the third annual Doing Well by Doing Good conference in Toronto. “Its purpose is to make charitable gifts, or charitable grants, to other charitable organizations.”

Donor advised funds are typically offered through community foundations, but over the last decade many Canadian financial institutions have moved into the space.

With 174 community foundations across the country, there’s no shortage of opportunities that advisors can look at for their clients.

As a charitable donation should be, a donor advised fund is an unalterable gift. “Once the assets are donated to the public foundation, for funding the donor advised fund, it is an irrevocable gift,” said Thorne. “The donor cannot get it back for personal purposes at any point in time.”

A donor advised fund foundation is similar to a family foundation in that “you could put a name on a donor advised foundation, a donor advised fund within a public foundation.”

It could be an individual’s name, a family name or a corporate name. “There’s the opportunity to have family involvement,” said Thorne. It allows for the successive generations to get involved with the charitable giving of the family.

It’s essentially a segregated fund within a public foundation or charitable organization.

The fact that donors get tax savings in the year that the gift is made makes it an important feature for many clients.

Typically, the assets are pooled with other assets for cost-sharing purposes. There are different ways – mutual fund structure, pooled endowment or private client – that individuals and organizations might be pooling those funds.

“There’s a different level of service in different organizations in terms of the personal planning and support for local, national, or international grant making,” said Thorne.

Some organizations and donor advised fund foundations have a tremendous amount of infrastructure to bolster their ability to help donors decide where they should direct their charitable giving.

“It’s a structure for both long-term flexible and multiple large and small beneficiaries,” he said. The structure provides a degree of control and accountability that is lacking in direct gifts to charities.

Also there’s the opportunity for anonymous giving, which may be critical to many clients. “For some clients the number one selling feature of donor advised funds is the ability to make significant charitable gifts without letting their family or the rest of the world know that they are the philanthropist behind that.”

There are other reasons why a donor advised fund makes sense. One of them is cause neutrality, the ability to separate planning and giving. It resonates with clients because they’re able to put complex or simple plans in place without the pressure of fundraising. It provides “the ability to simplify charitable gift plan, and the ability to give now and get that tax savings now, while designating charitable beneficiaries later.”

The fundraising pressure that comes from charities that are looking for revenue does not always sit well with the clients. Clients who have significant assets, or complex assets, want the freedom to plan and do so in privacy, said Thorne.

People like the opportunity to use a donor advised fund as it simplifies their life, their philanthropic plan, and allows for increased flexibility. “People need the tax receipt before the end of the calendar year, but they haven’t figured out what their charities are going to be.”

There are also clients whose assets are in transition, who’ve been busy running their business, or looking at the sale of the business. “When these clients want to do something philanthropic, donor advised funds give them the opportunity to structure and allow it to happen.”

So what’s in it for the advisor? Philanthropy is about a client’s personal values and understanding them provides an opportunity for enhancing the client relationship.

“If you can engage on the personal values, you increase the relationship with your client, you solidify it,” said Thorne. Philanthropy and the ability to talk about philanthropy – where a charity fits into a donor’s plans, knowing the specifics of a client’s plans – are the areas where advisors are able to have positive conversations and keep their clients.