What is a donor advised fund?
Imagine you have a bank account just for donating to good causes. Each time you put money into the account you'll get an instant tax benefit. But you don't have to decide which causes you want to donate to right away. You can wait until you're ready, and then you can tell your bank where and when you want to donate the funds. The money you put into the account could be invested in an ethically screened fund to grow in value and do more good in the world.
All donor advised fund (DAF) providers in the UK are registered charities who manage and administer donations on your behalf.
The benefits of donor advised funds (DAFs)
1. Tax relief - When you contribute to a DAF, you can claim an immediate tax benefit for the full amount of your donation even though the money may not be distributed to good causes until later.
For example: If you donate £100 to your donor advised fund, £25 will be reclaimed through gift aid making your donation £125. If you pay 45% tax, you could personally claim back £31 from HMRC as tax relief. This means a £125 donation only costs you £69.
Try using this calculator to estimate your tax relief.
2. Control - DAF account holders decide when and where the funds they deposit are distributed.
3. It's easy - Setting up and managing a DAF is far quicker and more cost efficient than setting up your own foundation. The grant making process is streamlined and the due diligence, reporting and administration of donations is managed by your DAF provider.
Donors can consolidate their charitable giving into one account, making it easier to keep track of donations and grant-making activities.
4. Greater impact - Donors can invest their DAF contributions in an ethically screened fund to have even more impact. This will potentially grow your donation over time tax-free, meaning more money available for charitable giving.
5. Be anonymous - DAFs account holders can choose to remain anonymous if they wish to.
6. Experience handling non-cash donations - DAFs can accept a wide range of assets as contributions, such as cash, shares, art, property and cryptocurrency. Giving these to a DAF avoids the capital gains tax that you would incur if you sold the assets then gave the money to charity.
7. Involve your family - DAFs often allow multiple family members to be involved in grant recommendations, fostering a culture of philanthropy within a family.
8. Develop your knowledge - Most donor advised funds will support their client to develop a deeper knowledge of the charitable landscape and philanthropic strategy.
Drawbacks of donor advised funds
1. Irrevocable - Contributions to a DAF irrevocable. Once you've made a donation into your DAF, you can't take it back.
2. Control - While DAF donors have influence over grant recommendations, the ultimate decision rests with the DAF provider. Although rare, a sponsor can choose to block a recommendation if it has strict policies.
3. Idle money - Some critics argue that DAFs can lead to funds sitting idle or not being distributed to charities in a timely manner, which might not align with the original philanthropic intent.
4. Fees - DAFs often come with administrative fees. UK DAF provider fees can vary among different DAF providers. For individuals with relatively small donations, the administrative costs of a DAF may outweigh the benefits.
5. High minimum contribution - Some DAF providers may have minimum contribution requirements, which could be a barrier to entry for individuals with smaller budgets.
6. Non ethically screened investments - Some DAF providers do not require an ethically screened investment which might be counterproductive to the donors philanthropic intent.
7. Transparency - DAFs do not require public disclosure of the donor's identity, which has led to concerns about transparency.
Do DAF pros outweigh the cons?
Yes
No
Is a donor advised fund right for you?
If you're considering the pros and cons of opening a donor advised fund (DAF), you should first speak to your legal, tax, and financial advisors. If they are not familiar with DAFs, a philanthropy advisor can help them learn more.
Make sure you compare the different donor advised funds available in the UK and pick one that is most suited to your needs.