Family office advisors are often asked to suggest the best ways to donate money. Families don’t know much about these methods, they say, whether it’s establishing a foundation, selecting donor-advised funds (DAFs) or creating an endowment.
Clients also tend to neglect to factor in the needed time, the level of oversight and the sentiments of other family members, says Angela Bhutani, vice-chair and treasurer of the Burgundy Legacy Foundation in Toronto.
Families first need to determine how much control and flexibility they’d like to have over their charitable giving, she says. While foundations can be quite complicated to manage, DAFs are more arms-length, and endowments have the fewest governance requirements.
Regardless of what a client chooses, their level of commitment is what matters, says Michael Nairne, president and chief investment officer at Tacita Capital in Toronto. “It all comes together really well if the family has significant philanthropic interest,” he says.
Bhutani agrees: “The key is engagement,” she says.
Giving back has traditionally been big in Canada. In 2021, Canadians donated $11.8 billion, according to Statistics Canada. Foundations make up a big part of this – in 2021, there were 4,961 public foundations and 6,189 private ones across the country, according to Philanthropic Foundations Canada.
But the path to charitable giving requires a careful analysis of a family’s needs and the desires of heirs, as well as a frank discussion about the administrative and governance requirements of each vehicle.
“You need to discuss: ‘How are you going to meet? How are you going to make decisions? How do you expect to participate?’” says Nairne.
Talk through the three options
- Foundations: A non-profit corporation or a charitable trust, a private foundation is not a public charity. Often created through a large endowment from a family, it generates income through investments and donates a portion of the investment income it earns to select charitable groups, says Nairne. It takes a lot of time, is not easy to set up, requires ongoing governance and necessitates financial reporting. As well, there are legal costs associated with the setup, a board of directors needs to be established, and board resolutions and policies need to be adhered to. “It’s an entity that requires so much commitment,” says Declan Ramsaran, managing director of PANGEA Private Family Offices in Toronto. “It can take more time than a full-time job.”
- Donor-advised funds (DAFs): These charitable investment accounts, managed and administered by a charitable organization, allow donors to make a charitable contribution when they want to, receive a tax deduction and also grant money from the fund when needed. “These are created to provide you some of the benefits of a private foundation – control and direction of giving — but without the complexity and hassle,” says Nairne. “A DAF allows you to advise on the funds to which you’re contributing, about the actual asset mix and how the funds work,” he says. Bhutani says that familiarity with DAFs is helping boost their popularity. “The direction toward DAFs has grown because the advisory community has a better understanding and can present these alternatives to families,” she says. Many families are opting for DAFs to simplify their giving decisions, she says. “We are finding that as families become more complicated in terms of where they reside, families are looking to DAFs as alternatives to foundations,” she says. This is because the administration is offloaded to the sponsoring foundation. Families can thus still act in an advisory role with regards to how the charities are selected for funding, but not act as directors.
- Endowment: An endowment is a gift to a non-profit organization with a specific mandate. The principal amount is invested, and resulting investment income is spent on initiatives decided by the donor or the organization’s board of directors. Endowments can be general, meaning they aren’t designated for a specific fund or program; restricted, which fund permanent, ongoing programs that have been selected by the donor; or named, which are named after a donor’s family member or a friend. “There’s a level of implied perpetuity in the endowment conversation,” says Ramsaran. “The expectation is to be in operation for decades to come.”
Assess a family’s needs and wants
Determining a family’s level of commitment is the first step in their philanthropic journey, says Ramsaran. “Core purpose, longevity and motivation are the real metrics for us,” he says. His team always has an in-depth conversation about a family’s charitable aims to ascertain which route to go, he says, adding that these discussions can yield some surprises.
“Families will often want to set up a foundation and do some good,” he says. “But then the conversation takes a turn when they discuss including kids in the project.” He says that often the next generation has no interest in managing a foundation, and that can profoundly affect what giving vehicle the family opts for.
“We help them to unpack a lot,” says Ramsaran.
Advisors should help present a number of scenarios for clients, Bhutani says. “The advisor is playing an important role in understanding the family’s capacity to give, the understanding of the tax benefits and perhaps magnifying the amount that’s being given,” she says.
Make the family aware of limitations
The issue with giving that way is that it’s too specific; if there’s a need for money elsewhere in the organization, those endowed funds cannot be accessed, Maggisano says. Unrestricted giving, conversely, allows capital to be allocated by a CEO where it is needed most.
Consider hybrids
Many families opt for a variety of charitable giving vehicles.
“We don’t see these vehicles in competition with each other,” says Bhutani. Whether that means structuring a foundation with a short lifespan or establishing a DAF and having it exist concurrently with that foundation, “they’re not exclusive,” she says.
What advisors recognize is that families have a lot of giving power but need guidance. It’s why family offices are playing a big role in assessing families’ philanthropic goals as well as the intentions and interest level of their heirs.
“It all starts from a heart position, but let’s walk down the path of what doing good looks like,” says Ramsaran. “Sometimes it’s a level of commitment that folks aren’t prepared for.”
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