Money & Career

How donor-advised funds work and help you give

Author: Canadian Living

Money & Career

How donor-advised funds work and help you give

Many baby boomers are, to their surprise, finding that they've got a ton of dough saved up in the bank. Years of hard work have paid off handsomely -- many have so much money they don’t know what to do with it. Why not give some of that cash to charity?

Instead of cutting a cheque to one organization, many boomers are opting instead to create a donor-advised fund (DAF). It's a relatively new tool that allows philanthropists to easily donate money year after year to charities they're familiar with. How donor-advised funds work

Individuals open a DAF at a bank, a community foundation or a charitable foundation such as Canada Gives ( Usually, you need to write an initial cheque for $25,000. That money is put into a fund, which is invested in the market. The person who sets up the fund is the one to decide where the money goes, how much of it is dispersed and at what times of the year.

DAFs are just like running a foundation -- but cheaper
Many wealthy people set up private foundations to distribute their wealth. That's a good option if you've got more than $2 million to donate and don't mind doing a lot of paperwork. A DAF takes out the administrative duties. Foundation executives have to hire their own auditors, for example; the organization running the DAF will do that for you. With someone else covering the admin work, people can utilize a foundation-like structure without having to shell out the exorbitant costs to run one. Other than that, a DAF and a foundation are essentially the same thing.

You have to give a certain amount every year
While you can direct who gets what and how much, DAFs have to pay out 3.5 per cent of assets every year -- even in poor stock markets. The idea is to have stock market appreciation and investment income from dividends cover the payout, but if markets crash, fund owners may have to distribute part of their principal.

DAF contributions are tax-deductible
Just as you would if you wrote a cheque to a charity, any money that goes into a DAF is tax deductible. But be aware that you only get the tax receipt when you put money into the fund, not when the funds are paid out to the charity. It would be sweet to get two tax receipts, but that’s not how it works.

Anyone can donate to your DAF
Got a wealthy friend who can't wait to give? Ask them to donate to your DAF. Anyone can put money into the fund and walk away with a nice tax receipt.

Get help deciding who to donate to
Most of the organizations that administer DAFs offer advice on who to donate to. Foundation executives have to do all that work themselves -- they have to either solicit charities to submit grants or seek out charities that need the money. While you can do that with a DAF -- and many people prefer to do that legwork -- you can also get recommendations on who needs the money most. Choose a cause that's near to you and ask the DAF organization to show you their portfolio of charities that best match your giving needs.

Think of giving on a spectrum. On one end is writing a single cheque. On the other is a private foundation. Donor-advised funds are in the middle. They're a great way for people to donate, essentially in perpetuity, without having to worry about making an administrative mess.


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Money & Career

How donor-advised funds work and help you give