I often get asked ‘What is the best vehicle for managing charitable funds?’. This is very much a question that doesn't have a straight forward answer and is best reviewed in context of your overall wealth strategy, which includes your tax planning and your legacy planning.
In order to help you determine the best tool for you to use in managing your charitable dollars there are a few questions you should ask yourself, and it isn't about the money:
1. How much time are you willing to commit to running a foundation?
You will likely have quarterly meetings, and an annual meeting. They may also require you to meet with other members of your family/company to determine how recipients will be determined and funds disbursed; your investment advisor on how assets will be managed within the foundation account and your legal counsel to ensure you are staying onside with the government. In addition to the governance and day-to-day operations, you will be meeting with your accountant quarterly and doing an annual filing with the CRA or IRS. Depending on how much activity goes on within your foundation will determine if you are volunteering more hours as you do site visits and attend charity events.
2. Who will be involved? Are you using this as a tool to engage your children in a leadership role within your family? Is this a way for your clients/vendors to get more engaged with your company? Is this your legacy and you want it managed in perpetuity? Who gets to make decisions around the donations that come out of the foundation?
3. What skills will be required to achieve your social vision? Do you need to open up your foundation to include people who have a certain level of expertise in a field or topic area?
4. Where do you want your foundation to operate? Is it solely for funding purposes, or will you be doing "front-line" activities - directly engaged in programs? Where do you want your funding to go? Will the funds be directed to charities within your home country (US or Canada) or will it be directed overseas?
There are four basic options that you have for planning your giving and growing your charitable assets:
Annual donations - Cash outlay that may be budgeted for, but not necessarily invested to grow.
Donor Advised Fund (DAF) - This is a foundation that is comprised of several "accounts" from individuals and families that pool the assets to spread the cost of management across all the contributors. It is called a Donor Advised Fund because you, the donor, advise the DAF's board of directors how you want the funds disbursed. The DAF will have rules and regulations as to how the assets will be invested to grow, as well as the types of charities that can be funded.
Community Foundation Account - Similar set-up and management to a DAF, except this organization may have a more limited scope in that only organizations within the community will receive directed funding. The traditional focus of a Community Foundation is to grow an endowment to support local activities and organizations. You can find some more innovative community foundations that explore how their funds can be used beyond the traditional endowment funding model. Using a Community Foundation to manage your charitable assets is weighted heavily on your values than on the asset management strategy.
Private Foundation - You have the control. You are responsible for developing out the governance, secure the funding, create the asset management strategy, handle all the legal and accounting, set the disbursement process and report back to the community.
Charitable Foundations/Public Foundations - Are entities that can be started by a single donor and then go out to the public for funding support. These organizations may also do front-line work, but this is narrow in scope as their primary mandate is to fundraise for issues/causes.
As defined by Philanthropic Foundations Canada, the key difference between a public and a private foundation is, "... a private foundation is controlled by a single donor or a family through a board that is made up of a majority (more than 50%) of directors at non-arm’s length (related to each other). A public foundation is governed by a board that is made up of a majority of directors at arm's length. A private foundation is NOT allowed to engage in any business activity, but it can operate its own charitable program."
For DAFs, Community Funds and Private Foundations once the money goes in, you cannot pull it out. So having a clear understanding of your financial picture is critical. What I like about DAFs is that it gives you a breathing room before you have to disburse funds to a charity. You can set up your account, deposit your funds, get your tax receipt and then figure out your giving plan.
Below is link to a chart created by Dexterity Consulting to help you and your advisor make some decisions as to the best charitable vehicle for your situation.
Gena is the CEO & Founder of Dexterity Ventures Inc. You can follow her on twitter at @DexterityCon.