A DAF is a great tool to engage the next generation because the donor can appoint their children, other family members or friends as succession fund advisors, meaning they will carry the responsibility of recommending the donations from the fund once the donor dies.BanarTABS/AFP/Getty Images
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Many people desire to leave money to charity upon their death through donations in their wills. Sometimes, this giving is through the creation of an endowment fund, but it’s often through a single, one-time donation of cash or securities to one or more charities.
Charitable giving on death has the benefit of leaving a legacy, but it also has a significant tax benefit.
In general, unless the whole of one’s estate is passed to a surviving spouse, when a Canadian taxpayer dies, their assets are deemed to have been disposed of at fair market value, and the inherent capital gain of those assets is reported in the taxpayer’s tax return for the year of death. The result is usually a substantial tax burden.
This tax burden can be offset by charitable giving on death because the charitable tax credits resulting from the donations can be used to reduce the tax payable by the taxpayer’s estate, and in the year of death, up to 100 per cent of the taxpayer’s net income.
A donor-advised fund (DAF) is a great way to blend the objectives of leaving a lasting legacy and offsetting the tax burden. It’s a formally structured vehicle for charitable giving administered by a foundation or a registered charity.
A DAF has the characteristics of a private foundation without the administrative burden, considerable set-up costs, and the requirement for setting aside a significant amount at the outset.
How to set up a DAF
A donor enters into an agreement with the administering charity or foundation that puts rules around how much of the fund is distributed to charity in any given year. The agreement can also specify the charities that will benefit after the donor dies.
In simple terms, the individual sets up a fund with a set amount of money (sometimes as low as $10,000), those funds are invested, the charitable dollars grow tax-free, and the donor decides how to divide up the income and part of the capital (if so desired) among Canadian registered charitable organizations every year and after their death.
Individuals who want to leave several charitable gifts in their will can instead leave those funds to their DAF and increase the impact on charity over time.
The gift to the DAF from their estate is a gift to a registered charity, so the estate gets the charitable tax credit, and the executor is relieved of the burden of dealing with multiple charitable organizations.
However, the funds continue to grow after death and can even be held in perpetuity, with only the net income being donated on an annual basis.
Creating a legacy after death
DAFs are also a great tool to engage the next generation because the donor can appoint their children, other family members or friends as succession fund advisors, meaning they will carry the responsibility of recommending the donations from the fund once the donor dies.
Many Canadian charities and foundations offer DAFs. Most major financial institutions also have affiliated charitable arms that offer them, sometimes with the benefit that the donor’s existing investment advisor can continue to manage the charitable funds being set aside.
A DAF is a powerful way to multiply someone’s charitable impact upon death and doesn’t create any complexity for the estate or the appointed executor. It should be considered for any individual who plans to leave money to charity upon their death or during their lifetime.
Jessica Feldman Chittley is partner at estate and family lawyers Bales Beall LLP in Toronto.