Donor Advised Funds (DAFs) are ‘accounts’ or ‘funds’ set up with a specialist sponsoring charity that allow donors to make contributions and recommend grants to charities over a period of time.
DAFs originated in the US, with the first funds dating back to the 1930s, and quickly gained popularity with commercial sponsors, educational institutions and charities. In the UK, the first DAF arrived 40 years later. However, it is only recently that we have seen an increased interest in DAFs, which are expected to reach contributions of over £1 billion by 2025 (as estimated by the Charities Aid Foundation (CAF)).
Whether or not a DAF is the most appropriate vehicle for a client’s philanthropy will, naturally, depend on the client, the circumstances and their objectives.
- DAFs allow donors to make initial contributions in any amount that they wish, with a possibility of increasing these over time. Where “would-be” philanthropists are not yet sure which charitable cause they would want to benefit, they can donate a sum to a DAF, giving the donor the flexibility to decide on the cause later on. The donor can then request a distribution to one or more charitable organisations or initiatives anywhere in the world, (subject to the appropriate due diligence) meaning they can benefit a variety of different charitable causes.
- The charitable sponsor of a DAF will provide services such as charity vetting which will be particularly pertinent where the donor wishes to benefit international charities and charitable causes.
- DAFs can be funded through a variety of assets, such as shares, third-party entitlements and other non-cash assets (including, in theory, cryptocurrency).
- The donor has the flexibility to name the fund in any way they choose, or remain anonymous.
- DAFs can also be used for estate planning. A donor can include an expression of wishes with their DAF, appointing a successor to their account. This can be used to encourage philanthropic giving across generations and allow family members to continue the donor’s charitable legacy. A donor can update their expression of wishes at any time without incurring further legal fees.
- This flexibility can be attractive to those new to philanthropy as it allows them to give to charitable causes in a flexible and diverse way.
Investment and tax planning
- It is increasingly becoming common for donors to utilise DAFs to increase returns on their investment. This can be achieved by working closely with financial advisers to design an investment strategy that would allow the original amount invested to grow over-time, for example through the use of growth funds or stocks, often including a social or an ESG objective The growth in the investment is of course tax free.
- A donation to a DAF will immediately attract the UK tax advantages of charitable giving (for example Capital Gains Tax relief and Gift Aid) even if the funds are not applied to charitable purposes until a later date. This can be attractive to those wishing to time their charitable giving for maximum tax benefit.
- DAFs can also facilitate tax-efficient giving by foreign individuals, who may choose to invest into DAFs that qualify for multi-jurisdictional tax relief. This is common for UK/US taxpayers, with the CAF American Donor Fund being an example.
Nevertheless, it is important to bear in mind that such flexibility does come with some constraints.
- Donors need to be mindful that gifts into a DAF cannot be revoked.
- Legally, although the donor can make recommendations regarding how the funds are subsequently applied, these recommendations will not be binding, as the charity/foundation holding the DAF has the final decision-making authority and responsibility over the DAF.
- There is no specific time limit regarding how long funds can be held within a DAF without being donated on to charitable causes. This can be a good or a bad thing, depending on your perspective!
- Where clients want to carry out more public philanthropy a bespoke charitable trust or foundation may be a more suitable vehicle, where the donor/family members can be trustees and carry out a more public active role.
- In particular, where a donor wishes to carry out charitable activities other than grant making, a DAF will not be suitable and a charitable trust or foundation will be required.
At Edwin Coe LLP, our cross-departmental Philanthropy team acts for a wide variety of charities and non-profit organisations, as well as individuals and families, advising on how best to structure their charitable giving. We regularly advise on the establishment of new charities and help clients meet their charitable objectives through other forms of charitable giving, such as DAFs. Please get in touch with any member of the Philanthropy team to learn how we can help.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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