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A more strategic approach to philanthropy

How does the emergence of the Donor Advised Fund work as a philanthropic vehicle and does it compare with the charitable trust model?

| 8 min read

The Donor Advised Fund

‘DAF’ model for charitable donations, already well established in the US, is now fast growing in popularity this side of the pond. DAFs are increasingly welcomed as a nimbler alternative to the charitable trust structure, so it is worth taking the time to understand the differences between the two and their relative merits. Together with a solid understanding of your clients’ philanthropic aspirations, you will then be well placed to advise which model will be optimal for each of them.

The rise of social impact investing reflects a growing trend towards a more innovative and impactful approach to philanthropy. Social investment provides long-term capital to a charity to help it scale up and become more sustainable; if the investment creates a return, it can then be recycled into further social investments or grants. As the Beacon Collaborative’s Giving Experience Report explains, this trend means that the line between investment and philanthropy is increasingly likely to be blurred.

This more holistic and ambitious view of philanthropy also brings its own challenges – how do you effectively integrate your goals in each area and how do you select which social investment opportunities to invest in?

Grant making too has become more complex at a moment when public trust in institutions is at an all-time low – with only just over half of the UK population saying they find the charity sector trustworthy, according to the CAF UK Giving Report 2023. Given the plethora of charities in any area, which ones can you support confidently, sure they are governing their resources effectively and are well-place to optimise and report back on the impact they are making on the ground?

The virtues of the DAF model

The flexibility and ease of the DAF model has made it the fastest growing structure for charitable giving in recent years. It is simply a much more convenient and practical framework for major donors than the traditional charitable trust or foundation model. It also lends itself to a collaborative approach between the DAF provider and a donor’s advisers, allowing for the DAF provider to give complementary philanthropic support which builds trust and loyalty between clients and advisers in the longer term.

The key points of comparison between a charitable trust and a DAF

Points for comparisonCharitable trustDAF
Set-up timeSeveral monthsImmediate
Set-up costSubstantial legal feesNo start-up cost
Ongoing costsSignificant - includes administration, developing policies and procedures, legal advice, accounting, audit and regulatory reportingUsually lower - a DAF provider typically deducts a one-off fee on gifts or an ongoing fee on the balance
Anonymity

No

Yes, if desired
Board structureYes

Not required

AdminClaiming Gift Aid; due diligence, grant agreements, managing grant payments and follow-up reporting; maintenance of bank accounts and investments; accounting and audit; reporting to regulators (Charity Commission, Companies House, HMRC)No annual returns; donor simply requests grants and/or impact investments; DAF provider claims Gift Aid and handles all compliance and administration
ExpertiseMay employ an administratorAccess to the wide range of skills and sector knowledge within the DAF team

In short, accessibility, anonymity and flexibility are the hallmarks of the DAF model.

When is a DAF optimal?

The DAF vehicle is ideal for grant making; it is nearly always the right choice for gifts under £10m. In addition to making grants to selected causes, philanthropists can also try to grow their account balance for the longer term by requesting for some or all to be invested. Returning to the social impact investment theme, major donors also have the option to allocate some – or all – of their account balance to support a charity with a loan or other funding arrangement. Of course, the investment also has the potential to generate a return to the donor’s DAF account that can then be recycled into further social investments or grants.

In addition, the DAF model lends itself well to legacy-making; it allows for more complex gifts, for example property or shares, and the donor can either allocate funds directly to one or more charities or appoint a named successor for their DAF account using an Expression of Wishes.

This is perfect for clients who want to pass their giving legacy onto the next generation. Where multiple charities are named, the DAF provider acts as a neutral intermediary, facilitating the gifts on behalf of the donor’s estate and so protecting lay executors from direct contact with the named charities. An Expression of Wishes can be updated at any time without having to incur lawyer’s fees.

When is a charitable trust or foundation better suited?

The charitable trust model is more appropriate for public fundraising events or for operational projects. It also gives the donor a greater sense of perceived control over their charitable fund than the DAF model, where the fund legally belongs to the DAF provider. In practice though that control is limited because the trust structure requires more than one trustee, and all trustees have to approve all grant-making decisions.

It is true though that the trustees also provide valuable support in grant strategy and decision-making which can help make the philanthropist’s journey less lonely. One DAF innovator, recognising this omission in the DAF model, has developed a pioneering Donor Advisory Board service, which allows major donors to include advisers, family members and other trusted third parties in their grant-making process. This functions in a similar way to trusteeship, but without the associated legal and administrative responsibilities. Moreover, a DAF’s independent structure also avoids potential conflicts of interest.

In summary

The traditional charitable trust or foundation model remains optimal for certain areas of philanthropy. However, it is unwieldy, costly and doesn’t allow for anonymity. On the other hand, the DAF vehicle is a more convenient, flexible and simple option for grant making that also allows for collaboration with a major donor’s advisers, with the result that clients feel better supported in achieving the impact they want to create with their philanthropy.

Case study: Stewardship Donor Advised Fund client, Guy

"My Donor Advised Fund account helps me with my giving because it allows me to build a balance of charitable funds via lumpy payments only a few times a year, and then to request my charitable donations out of that balance. Essentially, with a DAF, the money I put into it has ‘left my pocket’ – I can no longer use it myself, and HMRC recognises this for tax purposes – and I can ask my DAF provider to support my preferred charities. This allows me to:

  • Maintain a constant contribution level to all the charities I support. I don’t need to scale back my support at the times when I may have a lower income.
  • Take my time to decide my giving at the end of each tax year; at that point I can donate the funds I choose and benefit from the Gift Aid being added to my account balance, but without having to rush to select the charities to which I want to allocate these funds.
  • Have money set aside for the future to support any new or existing charities that may have an urgent need. Longer term, hopefully this will help me to continue supporting my chosen charities into my retirement."

Stewardship

Stewardship is a Christian charity and Donor Advised Fund that supports over 30,000 donors, including more than 800 philanthropists, and 13,000 charitable causes. In 2022, giving with Stewardship grew by 10% to just under £110m, with £44m granted out on behalf of its Philanthropy Services clients, and its payout rate was more than double the UK DAF average at 53%.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

A more strategic approach to philanthropy

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