donor advised funds: a guide for wealth advisers

Discover more about donor advised funds, the UK’s fastest-growing philanthropic giving vehicles, and how they can help your clients give flexibly and tax-effectively, to achieve greater impact with their giving.

In this article, we cover:

What a donor advised fund (DAF) allows
How a donor advised fund differs from a charitable foundation
What can you do with a donor advised fund?
The tax relief available for donor advised funds
How to involve the family in donor advised funds
Misconceptions around donor advised funds

A donor advised fund (DAF) allows:

• Ring-fenced money for long or short-term charitable giving
• Estate planning that can be modified without extensive legal fees
• Flexible gifting options
• Tax efficiency
• The ability to name the fund as you choose, or stay anonymous
• Ease of reviewing giving history and investments within one trust account
• The freedom to give to charities across the world from one vehicle without time constraints, with the responsibility for due diligence handled by the DAF provider
• Family to be involved and planning for your clients’ giving to continue beyond their lifetime
• Additional advisory and strategic support to help your clients have more impact and achieve their philanthropic goals

How a donor advised fund differs from a charitable foundation

A donor advised fund is a vehicle for charitable giving. It is an alternative, offering several advantages over charitable foundations, namely cost savings, tax-efficiency, flexibility, and ease of administrative, fiduciary, and reporting requirements.

Instead of registering a charitable foundation with the Charity Commission, clients can set up a fund with a DAF provider like our Charitable Trust. This provides everything you get from a standalone foundation but it comes under the provider’s umbrella, removing a lot of the hassle associated with running a foundation.

What can you do with a donor advised fund?

Gift

DAFs can be funded with a variety of assets including cash, shares, non-cash assets and third party entities. The tax incentives associated with a reduction in capital gains taxes make donating shares increasingly popular. Not all charities can facilitate shares gifts, but a DAF provider has the ability to do so. 

Your clients can make an initial gift into their DAF, followed by further gifts as and when circumstances allow. While the gifts are irrevocable and become the assets of the DAF provider, the client advises on where they would like the money to go.

Grow

Assets can be invested in a DAF for the long-term. As an advisor, you can help design an investment strategy that works for your clients and their philanthropic plans.

Diversification can allow for a mixture of investment into growth funds or stocks, social impact repayable finance, or ESG and ethical investing, multi-year grants and one-off gifts. This portfolio balance can allow for the original invested amount to grow and, in the case of social finance, for the impact to be multiplied with loans that are repaid and re-loaned multiple times. This flexibility and personalisation makes DAFs deeply satisfying and allows clients to enjoy their giving while the DAF provider absorbs the responsibilities of account management.

Grant

The due diligence to confirm the charitable purpose of grants sits with the DAF provider, or their delegated authorities. The grant is then made by the DAF provider on behalf of the client.

At CAF we can give to charitable causes anywhere around the world. HMRC has many rules on using UK charitable funds to support causes overseas. But we deal with those. We can fund programmes and initiatives, multi-year donations and put in place legal agreements where required to underpin some of the more complex forms of support clients may wish to provide.

Tax relief for donor advised funds

For UK tax payers, Gift Aid may be applicable on cash gifts to a DAF.

In addition, clients who pay tax above the basic rate can reclaim the difference between the rate they pay and the basic rate of tax via their personal tax returns to unlock further tax savings.  

For example, for a gift of £100,000 where the client pays tax at a rate of 45%:

• They donate £100,000 to charity
• The DAF can claim Gift Aid on the donation at 25%, so the charity receives £125,000
• The donor can reclaim £31,250 via their personal tax return (i.e. the difference in tax rates (45% - 20%) x gross donation of £125,000).

In order to qualify, clients must be a UK taxpayer and subject to an income or Capital Gains Tax liability equating to the same amount.

Involve the family in a donor advised fund

Some donor advised funds (such as ours) allow a client to involve their family and set it up so that their giving aspirations can last beyond their lifetime.

Family philanthropy can be hugely rewarding, bonding and valuable. It can give donors a chance to give beyond what may be possible as an individual. Giving together can make a bigger impact and provide more from the shared experience.

Misconceptions around donor advised funds

Criticisms of donor advised funds centre on the fact that there is no obligation to ensure that money in the fund goes out to charity in a timely manner. In the US, private foundations are required to pay out 5% of their overall holdings annually. There are no mandatory payout requirements for DAFs and they have therefore been labelled ‘warehouses of wealth’.

However, research into US DAFs has shown that over the last 10 years DAFs have consistently paid out over 20%. We also see this in the UK, with the aggregate grant payout rate in 2020 reaching 28%, according to NPT’s 2023 DAF Report.  

Another misconception associated with donor advised funds is that they are the ‘training wheels’ of philanthropy and inferior to setting up a private foundation. DAFs have been around for long time in the US and are increasingly being used in the UK. They can handle complex, cross-border giving, and, alongside philanthropy advice can be used to achieve real sustainable progress in society.