InvestmentRetire

Donor Advised Funds

By April 20, 2020 May 1st, 2020 No Comments

Rob:

Hey folks. Today we’re talking about donor advised funds. If you’re thinking about making charitable donations or aspirations to leave some money, this might be for you. I’m Rob Tétrault from robtetrault.com, Head of the Tétrault Wealth Advisory Group here at Canaccord Genuity Wealth Management.

I have with me none other than Adam Buss – Wealth and Estate Planning Specialist here at Canaccord Genuity Wealth Management. Ok, a donor advised fund, tell me when anyone would want to use one of these and how do they work?

Adam:

Great question. the whole concept of donor advised funds is having your mini foundation, but you can have an ongoing donation to charities of is your choosing. Donor advised fund for those who want to get the immediate tax deduction.

Let’s say, the high income year in particular, you want to get the immediate offsetting tax receipt, for example, you want to put half a million dollars in, get the immediate tax receipt today, but you don’t want to give that full amount to charity right away.

So you get the benefit of getting the immediate tax deduction. But then you can choose as to when you’re going to give it to charity over time that can create a lasting legacy or an endowment that you want to give to charities of your choosing as time goes on.

Rob:

Oh, that’s really neat. So obviously a big income year would be one to potentially use. You sell a business, maybe.

Adam:

a business, maybe rental properties. Sell a cottage, piece of farmland… Farm land or even just have a very high salary.

Rob:

And ideally I think they would likely work well in years where, towards the end of your career potentially where your income might drop off in future years so that you’re getting that full deduction at the top tax bracket and you’re getting it upfront immediately on day one.

Adam:

Absolutely, and it’s when you have those high taxes, why donate half of $1 million and get a tax receipt that you can’t really use to deduct off your income, you might as well do it while you have that high tax here.

Rob:

Now tell me about the payout policy or the payload structure for donor advised funds.  Are they kind of comparable to family foundations? Would it be like 3.5% or 4%… something like that?

Adam:

That’s a typical, if you have your own private foundation, it’s really the same for donor advised funds, but we work with our partner companies who kind of run the management behind the scenes, the administrative duties of a donor advised funds and they have that percentage obligation amongst all of the different accounts that are under their umbrella.

It doesn’t necessarily mean that your account, your donor advised fund has to give that percentage every year. There may be other ones that are doing 10, 15, 20% donations, which is taking away that average for everybody.

Rob:

Okay. So it’s a bit more flexibility there. Now why… So maybe take us through what a family foundation is and why someone would choose a donor advised fund versus a family foundation.

Adam:

Donor advised funds are easy. There’s far less administrative costs. You don’t have to go through the legal process of getting it set up. It’s easy. The lower fees, the less ongoing maintenance.

The nice part is you can still keep the funds invested, how you choose, with your favorite investment advisor, Rob Tétrault! You can continue to keep those funds invested. it’s just continuing to grow and have more money down the road that you can give to charity.

If someone were to set up their own family foundation, you mentioned specifically the upfront costs, you have to go through a lawyer, there’d be a lot of upfront legal costs, ongoing filing requirements, all those different things. Make sure there’s always a trustee in place to look after it. There’s a lot of responsibility that goes into it and it’s not necessarily right for everybody.

Rob:

Okay. in this scenario that you were telling us about, I sold my business, I expect to earn less income in future years, probably my last year of large income. I’m a charitable person, I’m a philanthropist. I’d like to donate. let’s say I wanted to donate $20,000 per year in perpetuity.

That would likely be somewhere around the half million dollar mark. Or you can put the money today. So I write a check effectively, or I transfer funds to the donor advised fund today. I get the complete deduction in this calendar year. And then annually on a go forward basis, I can then donate, $20,000 and that number gets donated every single year to the charity of my choice.

The neat thing about that I would imagine is maybe this year it’s a specific charity that’s dear to my heart, but maybe my aspirations and my feelings with respect to charities will change over the next years. And you’re not necessarily giving all of that chunk to one charity upfront.

Adam:

As soon as it’s under the donor advised umbrella, you get the immediate tax receipt, but then you can still control how much you want to give when, to which particularly registered charity in Canada. Just a ton of flexibility. There are a lot of options.

Rob:

We talked about maintenance, and maintenance requirements for the donor advised funds. It would be simpler and easier than a family foundation, much simpler. The timing itself in the investment control, you touched on that and it would typically stay with the investment advisor. Would you be getting statements from your donor advised fund?

Adam:

Another line item essentially on your statements showing the donor advised fund and how the performance has been, what’s invested within it. It’s just once it’s in that umbrella, you can’t say, well I just want to transfer that money back to my name. You can’t do that. It’s a charity essentially.

Rob:

and I would imagine if you want it to be really tax efficient in the year where you’re making your contribution, you could take non-registered assets that have significant capital gains on them and donate them to the donor advised fund and you would avoid the capital gains.

Adam:

Absolutely. You can transfer securities in kind, you can transfer insurance policies, all kinds of different options you can do to further optimize your tax efficiency. That’s part of the holistic planning approach that we want to take with clients. When you’re offering such solutions

Rob:

if you were to transfer a share that has a zero ACB, a $0 million average cost base, and you roll it in, your actual net cost of giving would be 25 cents on the dollar, correct?

Adam:

It would be substantially reduced versus just taking the money off your paycheck and donating it to the charity.

Rob:

Right, so you’re getting 50 cents up front and you’re avoiding the payment on the capital gains. Adam, anything else we need to cover here on donor advised funds?

Adam:

No, I think that pretty much covers it.

Rob:

We’ve been speaking to a lot of clients lately about these, these products and how powerful it can be for their legacy, giving their charitable aspirations. And I think it’s a valuable add. I think it’s really remarkable how much our standard of living is increased that now these have become more and more common.

The emergence of the wealth in the middle class in Canada is really remarkable, that these are now kind of top line tools that people are using on a day to day basis.

All right guys, thank you so much for tuning in. I’m Rob Tétrault. If you have a few more questions you want to know about donor advised funds… go to speaktorob.com

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