Understanding Donor Advised Funds (DAFs)

Donor Advised Funds (DAFs): what are they?

According to new research, donor advised funds (DAFs) are the fastest-growing vehicle in philanthropy. But what exactly are they, and who are they for?

A DAF is a charitable investment account established under an umbrella charity. Donors contribute cash, listed and unlisted shares, or other assets to the fund and receive immediate personal tax relief for the gift. Once in the DAF, funds can then be invested for growth and distributed to qualified charitable organisations at a later date, at the donor’s discretion.

What are the benefits of DAFs?

1. Tax Efficiency

Cash donations should qualify for Gift Aid in the donor’s hands. This means that there should be an immediate 25% income tax saving on the gross gift in the year of the donation. For example, if a donor gives cash of £1,000 and they are a 45% taxpayer, provided that the gift qualifies for Gift Aid, the donor should receive £300 tax relief, so the gift should only cost £700.

The DAF can also claim Gift Aid, increasing the donation from £1,000 to £1,200 which maximises the value available for charitable giving.

Donors can choose the timing of funding the DAF to suit their individual circumstances, for example, alongside an exit or to mitigate tax on a bonus payment. There is no time limit on how quickly the DAF needs to make onward grants, so donors can take their time.

If a donation is made between April and the following January, but before you have submitted your personal tax return, you can carry back the Gift Aid to the prior year.

DAFS can also receive qualifying gifts (listed shares and land) which exempt the capital gain and also reduce the donor’s income by the market value of the gift. For example, if someone gifts listed shares worth £100 to their DAF, any capital gain on those shares is exempt and they can reduce their taxable income by £100. Qualifying shares can be listed on any stock exchange around the world.

2. Simplification

By consolidating a donor’s charitable giving, DAFs can reduce the amount of administrative work that they may need to do, as they only have to make one claim. This means they are particularly useful for someone who makes a lot of grants throughout the year.

The DAF administrators handle compliance, record-keeping, and distribution logistics.

3. Expertise on tap

With private foundations, it is necessary to build external expertise. For certain foundations, this makes sense, but for those that are mostly grant-making, it is simply not the best choice. For such cases, DAFs are not only more cost-effective, but the donor also has the benefit of pooled resources, gaining access to expertise on tap from a team that they do not have to create themselves.

4. Involving the next generation

Previously, high net worth individuals and families invited their children to become involved in family-run foundations. However, through a DAF, they can involve their children in philanthropy and decision-making without giving them the money directly or passing on the administrative burden that comes with running a foundation. The children can also benefit from the expertise available within the DAFs to help them.

The next generation often has philanthropic objectives different from their parents’ priorities – and each other’s. Consequently, private foundations can be too restrictive in terms of being able to meet their charitable objectives. Since DAFs are broader in their charitable objectives, they can allow families to come together for their philanthropic activities without needing to be restricted by the previous generations’ philanthropic views.

5. Involving staff

Where companies wish to pool money that they have raised collectively, a corporate DAF could be the answer.

A corporate DAF can be a huge timesaver regarding the amount of administration that would need to be done. It can also be a great approach to increasing employee engagement – team members can raise the money and then collectively decide where to gift it, rather than having to decide ahead of time where the money will go.

6. Greater control

With some DAFs, a donor can appoint an investment advisor if their financial contribution is significant enough. So, if a donor would still like to have a certain degree of control, then a DAF may be a good option as they can allow for “mission-aligned investing”. For example, some donors might decide that they want to negatively screen a particular cause such as cancer charities not investing in tobacco products.

However, the inverse is also true. DAFs can allow donors to positively invest. If someone wished to contribute funds to a specific area that aligns with their mission – for example, investing in businesses that meet a social or environmental need that aligns with the family’s charitable purpose – then a DAF can be a great choice.

7. Privacy and anonymity

Unlike private foundations, DAFs allow donors to remain anonymous if desired, protecting their privacy in philanthropic endeavours. This means that, with DAFs, any potential worry about the risk to reputation is mitigated. DAFs are run by professionals, so they generally have very good governance.

The other layer of protection they offer is that they do not have to be named after the donor! So, if, for whatever reason, things do go wrong, the donor’s family name need not be connected and therefore possibly tarnished.

However, if a donor would like to attach their family’s name to the good that can be enacted by a DAF, this can be done! Chequebooks can be created under any name and, since each DAF has a name, when making donations, it is still possible to have a family (or other) name on it if the donor so wishes.

8. Transforming foundations

DAFs are great for foundations that are gathering dust. It is possible simply to tip the funds into a DAF, thereby removing the administrative pressure of a foundation – this is quite an easy process.

9. Inheritance

DAFs can be used in Wills, lowering a donor’s inheritance tax (IHT) rate if at least 10% of their estate is donated to the DAF.

However, donors should consider what will happen to their DAF after their death. It is crucial to appoint someone else who can make decisions once they are no longer around, as the responsibility for a DAF does not automatically go to any particular person.

Why choose a DAF over a private foundation?

Donor advised funds differ greatly from foundations. While private foundations offer more control and branding opportunities, they also come with higher setup costs, ongoing administrative requirements, stricter pay-out rules, and the risk of reputation damage if things were to go wrong. A DAF is often a more streamlined and cost-effective option for those seeking flexibility without sacrificing impact.

Is a DAF right for you?

If you are considering substantial charitable contributions and value simplicity, tax benefits, and flexibility, a DAF could be a strategic fit for your financial and philanthropic goals.

It is important to check the constraints of each DAF, especially if it is important to you to be able to give to whomever you wish, whether they are a community interest company or a non-profit organisation.

Once you are fairly confident that a DAF is the right choice for you, the next step is to consider which kind of DAF is right for you – and there are quite a few options! For example, the National Philanthropic Trust (NPT) is dual-compliant with the US and the UK (you would receive a tax break in both countries). Some are restrictive, whilst there is more flexibility with others. With certain bespoke DAFs, as long as the advisors are confident everything is in order, there is a significant amount of freedom and control available.

How we can help

At Mercer & Hole, we can help you evaluate whether a DAF is the right option for you, or whether other options would be more beneficial. We always strive to ensure that your generosity aligns with your financial objectives and that the impact of your philanthropic goals can be maximised.

Please do not hesitate to contact myself, Jo Bateson, or another member of our Private Client team to find out whether a donor advised fund is right for you.