Succession Planning for Private Foundations & DAFs

Private foundations are a popular avenue for many high net worth individuals who want to actualize their philanthropic ambitions. In Canada, we have over 6,000 registered private foundations and many more donor advised fund (“DAF”) accounts. But, while setting up a private foundation is an exciting milestone for many charitable donors, an embodiment of their commitment to charitable giving and community development. Too often, the intricate aspects of succession planning are overshadowed by the initial excitement.

While many wealthy families make comprehensive estate plans, far fewer consider the succession of their family foundation or their DAF accounts. In fact, a recent Ontario Court decision highlights the murky legal waters encircling DAF accounts in particular.

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Private Foundations & DAFs: Unique Vulnerabilities

Private foundations in Canada distinguish themselves based on the close-knit nature of their directors or trustees and funding sources. Such an arrangement typically provides families with considerable control over their foundation’s activities and governance. DAFs on the other hand, are managed by a 3^rd party services providers, outside the direct control of donors.

Both these legal frameworks render them susceptible to disruptions arising from personal life events such as divorce, disability, or death.

Separation and Divorce

When the spouses controlling a foundation or DAF account separate, the charitable assets remain undivided since they belong to the charitable foundation and not any individual. And although Canadian law disallows charities from directly gifting property to individuals, separated co-heads can still choose between collaborating for the foundation’s sake or pursuing their philanthropic agendas through distinct entities. Of course, such an agreement may be especially difficult considering the circumstances of divorce.

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Death and Disability

Misconceptions around succession after death or during incapacity can lead to confusion and legal tangles. Contrary to popular belief, roles such as a director or member cannot be directly handed down through wills or powers of attorney. And unless stated explicitly in the foundation’s bylaws, one can’t pass on their foundation membership posthumously through a will.

Likewise, as a recent Ontario Court case demonstrates, if documentation is not in place regarding the succession of DAF account, many donor advised funds may have no other choice but to disregard the advice of estate trustees and beneficiaries over the DAF assets connected to a deceased donor.

Proactive Planning: The Key to a Charitable Legacy

The solution lies in proactive, not reactive, planning. Instead of waiting for crises to dictate their course of action, families must anticipate potential challenges and document their wishes accordingly. An integral part of this is grooming the next generation, involving them in the foundation’s activities, and ensuring a seamless transition of responsibilities when the time comes.

The old adage “failing to plan is planning to fail” rings particularly true in this context. Setting up a private foundation is undeniably a monumental achievement. Yet, ensuring its longevity and resilience in the face of life’s unpredictability is where true success lies.

Action Items for Improved Governance and Succession Planning of Private Foundations & DAFs:

To guide families in fortifying their charitable endowment against unforeseen challenges, here’s a succinct checklist:

1. Anticipate Vulnerabilities: Understand the unique susceptibilities of your foundation setup. Work with a professional to conduct a risk management analysis and create a succession plan.
2. Draft Clear Bylaws: Ensure your foundation’s bylaws address what should happen in events like divorce, death, or incapacity.
3. Codify Decisions: Make informed, written board policies that can be revisited and updated as needed.
4. Consider Multi-Generational Involvement: Engage younger family members early on to facilitate smoother transitions in the future. Document their role and update by-laws as succession plans are made.
5. Regular Reviews: Periodically review and, if necessary, update the foundation’s governing documents. Once per year is probably fine for most.
6. Legal Consultation: Periodically consult with a lawyer specializing in charities law to ensure that all governance and succession planning measures align with current laws and best practices.

While establishing a charitable endowment is commendable, safeguarding its legacy against potential future challenges is equally crucial. By planning proactively, families can ensure their charitable endeavors stand the test of time, continually benefiting communities and causes close to their hearts.

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