Leave a legacy with a donor-advised fund

While there are a number of different types of intermediary charities, one that’s growing in popularity is the donor-advised fund.

Donor-advised funds are accounts at public foundations that enable donors to make recommendations about the use of the funds. While some foundations with donor-advised funds only pay out income from invested capital, others enable grants of both capital and income.

A donor-advised fund is designed to mimic many of the qualities of a private foundation, but is easier to establish and operate due to hosting by the already-established parent public foundation.

An innovation of the community foundation movement, donor-advised funds are now available through a variety of public foundations, including some sponsored by financial institutions. While they’re not a replacement for standalone private foundations in all situations, they are increasingly recognized as plan alternatives for their flexibility, simplicity and cost-effectiveness.

The primary advantage of using donor-advised funds in estate planning is the ability to change one’s mind about beneficiaries after the will has been written or the irrevocable life insurance policy is implemented. Unlike direct gifts to charity, you – or in the future, your family – may continue to make choices about how the funds will be distributed after the plan is created or gift is made.

In practical terms, you can implement your estate plans and then continue to research and make decisions about charities and causes you wish to ultimately support. This flexibility to alter beneficiaries without extra cost helps clients to implement their estate plans by removing the sense of finality.

Another option when structuring the donor-advised fund is the “legacy” donor-advised fund. To establish a legacy fund, you must initially work with the host foundation to establish a shell fund. While practice varies from foundation to foundation, typically a fund deed is drafted that creates the donor-advised fund and allows you to name charities or causes you wish to support.

Then you implement a gift plan, such as a gift by will. The gift in the will is typically a single clause that names the host charity and your fund. Even after the will is executed, the fund deed can be altered without cost. Indeed, you may establish the fund and make preliminary designations that you may change or refine over time.

Elaine Blades is an estate planning professional and Malcolm Burrows is head, Philanthropic Advisory Services at Scotia Wealth Management.

This article was updated June 3, 2016.