Donor-advised funds let you give without the hassle

Donor-advised funds in Canada have traditionally been structured as endowments, which means the donated capital is invested and only the income or a fixed annual payout is made to registered charities.

This opens the door to “legacy” donor-advised funds with short-term mandates.

Short-term legacy funds are helpful in improving the flexibility of common gift plans, such as the gift of an irrevocable life insurance policy that names a number of charities. The advantage of making a charity the owner and beneficiary of a life insurance policy is that you get receipts for each premium payment.

The disadvantage is the charities cannot be changed. Hence, in our experience, charitable life insurance policies have a high lapse rate because the beneficiaries cannot be changed to reflect your current charitable interest. By using a short-term legacy donor-advised fund, the life insurance policy is donated to the host public foundation and receipts can be issued annually. The major difference is that you can change the identity of the charities. When you die, the death benefit is paid through the donor-advised fund and the capital is granted out to the named beneficiaries. This structure provides administrative simplicity (with just one receipt each year), flexibility to change beneficiaries, and privacy in the planning process.

A long-term or endowed donor-advised fund that is part of an estate plan is often used for similar reasons as a testamentary trust. You can use it in your estate plan rather than an outright distribution because of concerns about the ability of beneficiaries to manage an outright gift. There may be matrimonial considerations, or the beneficiary may not be able to handle a large outright distribution. Or, a one-time distribution of several million dollars–or even $100,000–may simply not be in the best interests of the recipient.

The same can be true of a charity. While an outright distribution of $250,000 to a charity may, at first blush, be the simplest method of benefiting a beloved cause, such largesse may overwhelm a smaller charity and the charity may not be in a position to properly manage such a large one-time gift. Many people choose to stage distributions via a donor-advised fund for purposes of recognition or posterity, but also to take into consideration the longer-term needs of the charity.

Another advantage of the donor-advised fund structure is the ability to name causes as beneficiaries rather than individual registered charities. For example, it is possible to name animal welfare charities in a particular area. And, since we’re all living longer, it’s good to have some flexibility after the estate plan is drafted. A charity could close its doors during your lifetime, new ones can be created, or existing ones can become less effective. Often, naming a cause and leaving detailed instructions for family members or the host foundation is the best way to satisfy your original charitable intent.

Elaine Blades, director, Estate and Trust Products and Services, Scotia Private Client Group and Malcolm Burrows, head, Philanthropic Advisory Services, Scotia Private Client Group.