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  1. Wealth
April 12, 2017

Why DAFs are popular among British philanthropists

By Spear's

Donor-advised funds are the most popular charitable giving vehicle in the US, and the UK is now following the trend, writes John Canady

Donor-advised funds (DAFs) are one of the hottest things in philanthropy right now. Popular with wealthy families as well as those with more modest means, DAFs offer a flexible and convenient way to manage your charitable giving.

Often described as charitable savings accounts, DAFs can be an alternative to setting up a charitable foundation. A DAF is a charitable giving vehicle created at a charity by an individual or family to help make philanthropic gifts. You contribute personal assets (cash, shares, property, etc) to your DAF, which are then invested and may grow over time. Working with the charity that manages your DAF, you can guide your philanthropic gifts to charitable organisations in the UK and around the world. DAFs provide the functionality of a conventional grant-making foundation or charitable trust at a lower cost and with none of the associated administrative hassles.

Donor-advised funds have existed since the early 20th century, but they really surged in visibility and popularity (particularly in the US) around twenty years ago, when DAF providers started working with private banks and investment managers to make investing the DAF assets easy and flexible. Today DAFs are seen by many as an essential tool for charitable giving and estate planning.

Giving from DAFs now makes up more than 3 per cent of all charitable giving in the US, with DAFs now outnumbering private foundations almost three times over. According to the 2015 DAF Report published by National Philanthropic Trust, there is more than $70 billion in DAFs in the US, made up of close to 250,000 separate accounts. The charitable assets in these DAFs grew by over 23 per cent in 2015, continuing a trajectory of double-digit growth that began in 2010.

In recent years, more and more donors based in the UK have started using DAFs. The UK, of course, has a long and distinguished history of philanthropy, and London is a global hub for wealth management and family offices. The vast majority of British families and global families who manage their affairs from London have needs similar to their American peers when it comes to their charitable giving — more convenience and greater tax-efficiency. DAFs offer a simple, convenient and cost-effective solution.

DAFs have become so popular in part because of their flexibility. The setup process is surprisingly simple and convenient: you can set up a DAF in one day. After that it requires minimal administrative oversight. Things are so simplified for donors that you can make a single contribution to your DAF and then recommend as many grants to as many approved charities over as long a period as you like. The charity that sponsors and manages your DAF will provide you with a tax receipt for your contribution. It will also conduct all the necessary due diligence on the grant recipient, review and approve the grant, send the grant payment and conduct any necessary follow-up to comply with tax and charity laws.

You may contribute cash, as well as other assets such as shares and property. DAFs make it easy to convert a wide variety of assets into philanthropic capital. These can include property, works of art, collections, and other tangible personal property. In recent years, donating illiquid assets to DAFs has become a more popular trend. Donors are looking beyond their investment portfolios to view their total wealth as potential gifts to charity.

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DAFs also allow the publicity-shy to conduct their giving in anonymity. With a DAF, the charity that sponsors your fund can serve as the grantor instead of using your name. This can come in handy if you wish to avoid unwanted attention when making a large grant.

DAFs can also be used to create a giving legacy. You may leave testamentary gifts (such as legacies and bequests) to your DAF, and you may name successors to it, such as your children or grandchildren. They can assume investment and grant-advising responsibilities after your death to ensure a continuing legacy of giving in future generations.

When you make a gift to your DAF, you are making an irrevocable donation. Since they are managed by registered charities, gifts to DAFs are tax-relieved. You receive a tax receipt when you make a donation to your fund. You may contribute assets when it makes the most sense from a tax planning perspective, and then decide in your own time which charities to support. Because donors receive immediate tax relief, using a DAF can be a preferred approach to reduce tax burdens after a windfall situation. Donors often make substantial gifts to their DAF when a significant liquidity event occurs — an IPO, selling a business, an inheritance, or a large bonus.

For cash donations to a DAF, your contribution increases 25 per cent when the charity managing your DAF reclaims the Gift Aid. Higher and additional-rate taxpayers may also claim tax relief on their self-assessment tax return.

If you have appreciated shares in your portfolio, you may donate the shares to your DAF, eliminate the capital gains tax liability and receive tax relief on the full market value of the shares on your self-assessment tax return. If a donor were to liquidate the shares and donate the proceeds to their DAF, the amount would be reduced by the capital gains tax, which would leave less money available for philanthropy. When you donate the shares directly to the DAF, the charity sells the shares and the donor eliminates the capital gains liability.

A variety of charities sponsor DAFs. When selecting a sponsoring charity to manage your DAF, you should review the sponsoring organisation’s policies regarding grant recommendations, minimum contribution requirements, investment options, donor services and fees. You may also want to consult with your solicitors, estate planners or financial advisers. After your DAF is established, you can focus on what’s important: giving to charities that mean the most to you.

The overarching aim is to make it as easy as possible for donors to give to good causes around the world. Offering such abundant benefits, both financial and personal, it’s little wonder that DAFs are philanthropy’s fastest-growing vehicle for charitable giving, with the UK on track to follow in the footsteps of the model already thriving in the US.

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