Looking to support a good cause? You have an important choice to make

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When people decide to give back to society, there’s often a foundational question: Is it better to conduct philanthropy through a public foundation or a private one?

The two types have similarities, but the differences can be large and the labels can be deceiving. Deciding which structure is best can also be a reminder that giving away large sums of money is not necessarily easy.

“There are pros and cons for each type of foundation. What works for one family doesn’t necessarily work for a different family, because charitable giving is ultimately quite personal,” says Arundel Gibson, family advisor, philanthropy and impact, at KPMG Canada.

Of course, the simplest way to give money to a cause is to write a cheque directly to the organization. This can be a good option for an individual or family that wants to start a relationship with an organization, Gibson says, but donors who want to stay involved after the initial gift often opt for a foundation to build a longer-term connection.

That’s the point at which donors who want to go the foundation route have to decide whether a public or private foundation is more appropriate. The two types have different governance structures, they are administered differently, have different reporting requirements and, depending on the circumstances, one type can be more work for a family than the other.

“To determine which one is best, we start by sitting down with a family and working on a strategic philanthropy plan,” says Chris Clarke, chief executive officer of First Affiliated Holdings Inc., a family office based in Collingwood, Ont.

“What does the family want their philanthropy to achieve? What are their goals, both for the organizations that will receive the donations and for the family members as well?”

Basics of public foundations

With a public foundation, the administration of the charitable initiatives gets taken out of the hands of the donors, allowing them to focus on identifying and helping good causes rather than on the paperwork, Clarke says. The directors of a public foundation operate at arm’s length.

The most common type of public foundation is a donor advised fund. These foundations are set up and managed either by financial institutions or by communities and cities, to distribute funding for good causes such as housing, the environment or job training, for example.

The advantages of giving through a donor advised fund are that it is simple and quick to set up — it can be done in a day in some cases, Clarke says. There are no direct legal fees for the donor, who receives quarterly reports about how the public foundation is investing and granting.

Donors who give to public foundations relinquish some control over how the foundation’s money is used. While donor advised funds like to work with the givers to fulfill their wishes, all registered charities are required by law to give out 3.5 per cent of the average total value of their assets every year, so unless the donor is actively involved in the public group, day-to-day decisions will be made by others.

Despite the name, public foundations can keep their donors’ identities anonymous; there is a public record of donors, but those who don’t want their names listed can keep their privacy.

“It’s the donor’s prerogative to be anonymous, but some choose to keep their names public to encourage others to give,” KPMG’s Gibson says.

One downside to philanthropy through a public foundation is that donor advised funds charge a fee for giving and administering the gift, typically between 0.5 and 1.25 per cent annually. The public foundation’s independent board also decides how the funds are invested.

Basics of private foundations

A private foundation is run by the family itself or whomever the family designates, Clarke says. The family sets up its own foundation board, which can include family members, and it determines who will manage and staff the organization.

The drawbacks to using a private foundation for family philanthropy are that it can take many months to set up and it can be costly. “Legal costs from $10,000 to $25,000 are common,” Clarke says.

Tax compliance can also be more complicated and costly for private foundation donors. Private foundations actually must provide more information to the Canada Revenue Agency than public ones.

A family that sets up a private foundation also has to run the foundation, which means it must keep records, hold board meetings and administer the funds — jobs that the public foundation takes out of the family’s hands. Private foundations also have to set up their own systems for determining who receives grants and how much each recipient gets.

‘Reputational capital’ also a factor

Both types of foundations are bound by law to maintain a fiduciary approach to their granting strategies, keeping focus on capital preservation so the foundation remains financially viable.

A public donor advised fund that’s offered by an investment dealer can have an investment mandate that’s limited to the dealer’s own investment platform, a restriction that might rankle some wealthy families. “But there are public foundations that allow independent investment mandates managed by the donor, with approval by the foundation board,” Clarke says.

Some wealthy families prefer private foundations because of the “social reputational capital” that comes with having your own private giving organization, Clarke says.

Keeping the family in charge can also bring the family together, says family office executive Patricia Saputo, who is co-founder and executive chairperson of Crysalia Inc. in Montreal.

“High- and ultra-high-net-worth families can use the foundation as a learning tool for making financial decisions together,” Saputo says. “It’s a good start to understand what causes people hold close to their hearts, and for distant family members just to get to know each other.”

Gibson adds, “A private foundation is a really great option for families to engage the next generations and educate family members in financial literacy. It’s an opportunity for the family to build a legacy.”