Since private foundations and donor-advised funds basically do the same thing it shouldn’t make that much of a difference which one your client chooses, right?
While private foundations used to be the norm for wealthy individuals wanting to structure a legacy of giving, the arrival of donor-advised funds has offered a popular alternative in recent years, according to Margaret Mason, a partner with Bull, Housser and Tupper.
“When a client asks to set up a private foundation, I discuss the alternative without all the infrastructure and administration. You can go to a community foundation or any of the banks and they all have donor-advised funds established. The minimums are much lower – typically you would need millions to make a foundation worthwhile. Private foundations can work well when there is some sort of intergenerational idea or mission to keep it on track, but they do take some time to manage.”
Private foundations have been around for a long time and this is the most structured way of giving, says Jo-Anne Ryan, vice president of philanthropic advisory services at TD Wealth, and the executive director of the Private Giving Foundation.
“For a private foundation you need a lawyer to set up a trust, which requires a trustee, or a non-share capital corporation, requiring a minimum of 3 unpaid board members,” explains Ryan. “You apply to CRA for a registration number, with the fiduciary responsibility to ensure that the funds are managed prudently and that you are complying with CRA’s rules with regard to charities.”
“As an alternative to setting up a foundation you can have a donor-advised fund for as little as $10,000. You open an account, name it as you would name a private foundation, donate to it and the money grows tax exempt, as you pick and choose the charities that receive money every year,” adds Ryan.
Donor-advised funds and private foundations can each play an important and unique role in philanthropic giving, helping Canadians to have an impact and put their charitable dollars to work, according to Hilary Pearson, president of Philanthropic Foundations Canada.
“The great advantage of a private foundation is that you have full scope and control. You can bring everyone together around the table as often as you want to develop a real sense of shared purpose and foster shared family engagement in your own giving vehicle and framework," says Pearson.
Marvi Ricker, vice president and managing director of philanthropic services for BMO Private Banking believes that you need to understand the advantages and disadvantages of each approach and consider the specific circumstances before making a decision.
“It is important to know that when you are going in to a donor-advised fund, you don’t have complete freedom and flexibility for how much you are going to grant, because there are limitations created by the public foundation that is holding those funds,” says Ricker. “With a private foundation, you have freedom to make grants as you wish within the CRA rules – but you also have the responsibility of administering that foundation.”
According to Pearson, advising clients on the differences between a private foundation and a donor-advised fund provides the ideal opportunity to enter into the philanthropic conversation. And that dialogue will ultimately be a rewarding experience for both you and your client.