Donor-advised funds have become a big hit in the US and are gaining ground in Europe, so the author of this article says. DAFs can be useful for high net worth individuals looking to mitigate tax and do some good.

There is an old, perhaps rather barbed saying that the early settlers in the American colonies went there to do good and ended up doing very well. But there is no doubt that for those with a charitable impulse there can also be significant benefits for which no apology is needed. In this article, John Canady, chief executive of National Philanthropic Trust-UK, talks about the case for what are called donor-advised funds. The editors at this publication don’t necessarily share all the views of such contributors but value these insights on philanthropy and the structuring of assets. 

Given the tax incentives provided by HM Revenue & Customs, charitable giving is an important element in any wealth management and tax planning strategy. As tax relief becomes more limited after the changes in the non-domiciled regime and the forthcoming changes to pension tax relief, many clients are revisiting charitable giving as a way to achieve a tax savings while doing good in the world.

Donor Advised Funds – or DAFs - are the fastest growing giving vehicle in the US (there is more than $70 billion in donor-advised funds in the US) and are gaining ground in Europe. If they match the popularity they’ve seen in the States they may eventually overtake traditional charitable trusts and foundations as the vehicle of choice for charitably-inclined people.

Tax lawyers, accountants, and wealth managers all have a key role to play in helping clients find the best philanthropic vehicle for their needs. Clients do not expect advisers to be experts on philanthropy but to connect them to other experts and solutions. So here is a quick guide to what DAFs are and how they work for you (or your client).

A DAF is essentially a charitable savings account which acts like a grant-making foundation or trust. But foundations and trusts take a lot of time and money to set up and, perhaps more importantly, to administer going forward each year. A DAF can be set up in a couple of days at minimal cost. “I’ve met several clients who set up a trust and ended up feeling a bit put out when they realised they could have had a donor-advised fund instead,” Tom Hall, head of philanthropy services at UBS Wealth Management, has said.

The client opens a donor-advised fund at one of the charities offering DAFs and then donates assets to their DAF account. The assets in the DAF account can be invested for growth. And when the client is ready, they recommend grants from their DAF account to charities in the UK or abroad. DAFs essentially allow clients to have their own foundation or charitable trust with none of the administrative hassle and overhead.

Perhaps the biggest advantage is the ability to make donations to the account and receive immediate tax benefits while being allowed to wait and decide later which charities you would like to support. Having the option to invest and grow the assets instead of immediately disbursing them gives you more time to research charities and decide how best to allocate your donation.
 
Another advantage is the ability to donate shares and tangible property.  Many small charities can only accept cash.  With a DAF, clients can look at their entire portfolio and decide which assets make the most sense to donate.  For example, donating appreciated shares to your DAF account allows you to eliminate the capital gain tax liability and take tax relief on the full market value of the shares.

Convenience is also a major draw for clients.  People love the ease of it.  On one hand, DAFs democratise philanthropy.  Clients can open a DAF account with only £20,000 ($28,554).  But it is not just the moderately wealthy who find the convenience a draw.  Very high net worth individuals are also using DAFs, sometimes donating hundreds of millions to their DAF accounts. From long established families to new Silicon Valley tech billionaires, DAFs are one of the tools they use to carry out their philanthropy. Clients also like the convenience of having someone else conduct the due diligence on the charities they fund. The DAF provider ensures the beneficiary charity qualifies under HMRC and Charity Commission guidelines.  And finally, clients appreciate the ability to be discreet.  If they prefer, clients can request that a grant from their DAF account to a charity be made anonymously. 

Andrew Carnegie once famously said, “it is more difficult to give money away intelligently than to earn it in the first place”. While DAFs do not resolve the dilemma of where to give, they do help clients give more intelligently and tax-effectively.  The explosive growth in DAFs across the Atlantic can largely be attributed to advisors speaking to their clients about DAFs and integrating charitable giving into their wealth management and tax planning.

When advisors make their clients aware of donor-advised funds, clients respond.  Donor-advised funds are often a win for the clients, advisors and the charities that the clients support.