Which is Better: Donor Advised Fund or Private Foundation?
When working with donor advised funds (DAFs), one of the issues that inevitably arises is the comparison between DAFs and private foundations. Which structure is better? Which one should we set up? And just what is the difference between the two anyway?
DAFs and private foundations differ considerably when it comes to administrative burden, cost and above all, paper work. Private foundations require registration with the CRA, multiple annual filings of documents, and can cost up to $10,000 to set up. The lion’s share of administration for a DAF is the responsibility of the sponsoring charity, including tax receipts, and there is no cost to get started.
There is one area where private foundations may get the nod, depending on your particular client’s needs. Private foundations can hire and pay staff, while they cannot use DAF assets to do the same. The flip side is that the sponsoring charity is handling that workload for you. Unless you plan on hiring Cousin Eddie to run your foundation this may not be an important concern.
Privacy
This is a big issue and deserves a little more attention. Keeping in mind that DAFs are generally offered by public foundations, here’s an ironic statement for you:
In Canada, private foundations are public, and public foundations are private.
What does that mean?!
Here’s a real-life story to help explain. A few years ago a financial advisor called me to talk about his clients, a rural couple who had created a private foundation about five years ago, and called him to complain that it “just wasn’t fun any more.” Pressed for more detail, he told me that while they enjoyed sitting around the table with their children discussing which charities to support, they didn’t enjoy the paperwork. The advisor and I discussed the points highlighted above, and whether or not the specifics applied to his clients and what they were trying to achieve.
He was already fairly convinced that a DAF was the way to go, when I added the comment, “And then there’s the privacy issue.” His reply: “What do you mean? It’s a private foundation.”
Over the phone we both pulled up the CRA Charities Listing website. Telling him where to point his mouse, in exactly three clicks I had him pull up his client’s T1236 Form for the previous year, showing a list of what charities had received how much money from their “private” foundation. Knowing his clients well, he told me they were extremely private people, and he was shocked that this information was so easily available.
Let me be clear. Public foundations that sponsor DAF programs must also file a T1236. We do it here at Chimp. And with those same three clicks you can pull up a listing of all grants processed through us last year. Thousands of them. Five dollars to this charity, a million dollars to that charity. And every single one of them coming from Chimp, with no indication which underlying DAF account actually made the donation. In effect, every donation is made anonymously, unless the donor requested otherwise.
So yes, privacy. For some people it’s not important, but for others it is critical.
Working Together
In my view there are many private foundations that are set up unnecessarily, and where donors would be better served using a DAF structure. That being said, there are some good reasons to use a DAF alongside a private foundation.
First, there’s the disbursement quota issue. Known affectionately in the charity world as the “DQ”, the disbursement quota is the amount of money foundations are required by law to disburse — in other words, give away to charities — every year. In Canada that number is currently 3.5%. So (keeping it simple) if your client has a private foundation with $5 million in assets, they must give away $175,000 a year. That means writing cheques and letters, licking envelopes, tracking grants, etc. Or, they can make a single donation of $175,000 into a DAF, and let the DAF sponsor do the work, while they take their time determining which charities to support, and hopefully letting the invested assets grow. Your clients can take care of their disbursement quota with a single transaction.
Or let’s say your clients operate the Jones Family Foundation for the Arts and have a wonderful reputation in your community for supporting artistic endeavours. That is their mission. However, because of a personal situation, the Jones family wants to make a sizable donation to the local hospital (or zoo, or food bank, or church, etc.) without letting anyone know about it. I call this off-mission giving. For the reasons we discussed above, a DAF would be a wonderful vehicle to facilitate this anonymous gift. Using Chimp as an example, this donation would be recorded on the Jones Family Foundation for the Arts T1236 as going to Chimp: Charitable Impact Foundation, and the trail would end there.
A final point. For those who find themselves in a similar position to the advisor’s client above, the CRA provides a very simple process for “deregistering” a private foundation, called voluntary revocation. Many choose this option to close their foundation and move the remaining assets into a DAF. The sponsoring charity will often allow donors to name the fund, so the generosity of the Jones Family Foundation for the Arts, for instance, can live on.
Whether used in place of a private foundation, or alongside one, a donor advised fund can be the right charitable structure for your philanthropically-minded clients. We’ve already discussed why it can also be good for your wealth management practice in previous articles.
Previous articles in this series:
Why Should a Financial Advisor Care About Philanthropy?
How Donor Advised Funds Will Enhance Your Wealth Management Practice
How to Have the Philanthropic Conversation
Based in beautiful Vancouver, Mike is the Director of Charitable Investment Programs for Chimp. He loves the wealth management business but his heart is in philanthropy, so this is his dream job. Mike can be reached at mike.todd@chimp.net
