Donor-advised funds: The modern alternative to foundations and charitable trusts

When contemplating philanthropy, most wealthy individuals think primarily about the good that their generosity might accomplish.

As affluent individuals and their family members think ever more strategically about their philanthropy, one of their first questions is “should I start a private foundation, use a charitable trust or open a donor-advised fund?”  

Our advice is to start with your philanthropic goals and objectives, as those can inform decisions about the charitable vehicle used to facilitate your giving. 

Philanthropy can require a significant investment of time and resources to establish and maintain. While there is no minimum sum needed to establish an entity, it is important to weigh the initial funding and future revenue streams to be devoted to philanthropy with any set-up and ongoing operating costs in the case of charitable entities, or ongoing fees charged once an account is established in the case of a donor-advised fund.

Another consideration is how much time a family can devote to philanthropic activities. This means not only grant making, but can also mean investment decisions, governance and compliance requirements of certain charitable entities. 

A donor-advised fund (DAF) is a giving vehicle that offers wealth owners a way to inject more structure and strategy around their philanthropic pursuits.

A donor makes an irrevocable charitable donation to a public charity that sponsors and administers DAF accounts on behalf of donors. 

The donor receives the immediate tax benefit, as complete control over the assets resides with the DAF sponsor. They also have the privilege of recommending grants to qualified public charities over time and can also recommend how the charitable assets are invested before being granted out. 

The DAF sponsor manages all the administrative functions such as legal oversight, diligence of qualified public charities, and recordkeeping. 

There are no start-up costs or fees to open a DAF account. Typically, a charitable administration fee and investment management fee are charged to the DAF account based on the value of the assets held in the account.

Most types of assets held in the DAF account grow tax-free, thereby enabling donors to build an endowment of charitable assets with which to support causes they care about. 

Most DAF sponsors accept contributions of cash and publicly traded securities. 

In the US and the UK, many DAF sponsors accept a wide range of illiquid assets, including real estate, hedge fund and private equity interests, privately held business interests, and restricted and controlled stock. Because these assets are complex and unique, they require a due diligence evaluation by the DAF sponsor. For such assets, they will want to ensure there are no restrictions that preclude them from taking legal ownership of the asset, they will assess any additional risks, claims, encumbrances, or carrying costs on the asset, and they will want to understand the exit strategy to sell the asset. Other planning matters must be considered before these types of assets are donated.  For example, there may be minimum contributions for the types of assets the DAF sponsor will accept.  The donor may be required to obtain a qualified appraisal for the property, or they may need to satisfy any debt obligations for the asset donated.

Philanthropic families today are busier than ever. And while they have good intentions, they often do not have the time for implementation.  

On the one hand, a private foundation or charitable trust provides structural rigor. On the other hand, these bodies involve significant ongoing regulatory compliance. 

For some families, the rigor, structure, and cachet of these represent an important objective for their philanthropy.  

For others, simplicity and ease of use are current objectives. For such families, a DAF is simple and easy to set up and use. 

There are no filings required to set up a DAF, and there are no costs or ongoing compliance requirements for the donor when using a DAF. The DAF sponsor handles all the administrative functions and provides the recordkeeping to track the granting. 

Using a DAF is often seen as a first step beyond ad-hoc charitable giving. It helps families to “dip a toe” into the waters of charitable giving without the pressure of making grants right away. 

A DAF does not require an annual minimum payout of charitable assets, unlike private foundations and charitable trusts in certain jurisdictions. 

Since there is no urgency to make grants right after a DAF donation, there is greater time to consider more impactful disbursements. 

This “build the plane while flying” approach is very helpful for families, given the time required to learn about the nonprofit sector. 

There are many ways to support nonprofit partners, numerous strategies that funders can employ and a variety of granting models that DAFs can accommodate. 

Donating to a DAF offers a committed step toward philanthropy, as those assets are now set aside for charitable purposes. This can create a longer-term approach to giving. Charitable giving becomes less dependent on capital and tax considerations, and more focused on making impact with its endowment.

Succession planning can be an important goal within a family’s philanthropy and frequently includes engaging children to take over the family philanthropy. 

Both charitable entities and a DAF can be a good way to introduce philanthropy to younger family members. DAFs can be opened with a small donation and there is no time pressure in selecting grant recipients or amounts to be granted. 

Each generation of a family may have different causes they want to support.  For example, a family’s existing private foundation may have legacy commitments and a mission defined by the older generation.  

The DAF is a great way to engage the younger generation to diversify giving and grantmaking and help them get a clearer sense of their own philanthropic interests and experiences, which may be outside of the scope of the existing foundation. 

The primary advisor to a DAF account, typically the donor, can designate successor advisors in the event of death or incapacity. As a successor advisor, further successor advisors can be designated as well.  This cycle of designation can perpetuate the family’s philanthropic legacy for many generations. With a charitable entity, provisions in the governing documents should address adding and removing board members or trustees.

For other families, succession is not a goal, and both charitable entities and a DAF can be used to either sunset the philanthropy or immediately grant all remaining charitable assets.  

To continue the legacy of giving after the donor passes with a DAF, planning for legacy includes a written legacy plan for the recommendation to make an annual grant of a certain percentage of the charitable assets to one or more qualified charities until the balance of the account is depleted. This can be updated at any point in time while the donor remains the primary advisor. In this way, charities can continue to receive support after the donor is no longer with us.  With a charitable entity, succeeding board members or trustees will need to carry out the donor’s wishes with respect to continued legacy.

If a family prefers to grant all remaining charitable assets upon their demise, a written legacy plan with the DAF for the recommendation to grant all charitable assets to one or more qualified charities is all it takes. Whereas for a private foundation or charitable trust, in some jurisdictions, approval or formal notice of termination is required.

Philanthropy is very personal and, for many families, it is also very private. 

Such families prefer to practice philanthropy by “flying under the radar.”

A DAF is an easy way to provide anonymity of grants not only to the grantee itself but also to the public. 

Since the grants to the qualified charities are distributed by the DAF sponsor, they are not identified with the donor making the recommendation.  

In many jurisdictions, grants paid and/or payable in the future are required to be included within tax documents that are available for public disclosure. 

For private foundations and charitable trusts subject to these disclosure requirements, a grant to a DAF can become very attractive if they want to donate outside the scope of their core mission or support organizations anonymously.

As a giving vehicle of choice, DAF popularity continues to grow globally. 

In the US, between 2018 through 2022, the compound annual growth rate for the number of DAF accounts was 22.6% as the number of DAF accounts approached two million with charitable assets valued in excess of $220 billion.¹

The UK DAF market is still relatively small. Nevertheless, the compound annual growth rate of contributions to DAFs in the UK during this same period was 13.7%, with charitable assets valued at over £2.5 billion.²

The DAF landscape in South Asia is nascent but growing quickly, with a handful of DAFs in Singapore and Hong Kong. According to the Community Foundation of Singapore, DAFs are the fastest-growing option for giving in Singapore.³

While tax is not the principal driver when it comes to philanthropy, it is one of them. In the US, the charitable tax benefit afforded donations to public charities – which include DAF sponsors – is better than that afforded to private foundations or charitable trusts, hence the tremendous growth.  

The philanthropic landscape is evolving quickly in South Asia as both Singapore and Hong Kong appear to be in an arms race to become the philanthropic hub of Asia. 

The Singapore government has been especially forward looking with the introduction of the philanthropy tax incentive scheme and the overseas humanitarian assistance scheme for family offices, donors and corporates who wish to give regionally. It is easy to see the growth potential in this region.

Each giving vehicle has its own advantages and drawbacks depending on an individual or family’s objectives. There is no one-size-fits-all approach to philanthropy. 

It is important to keep in mind that one or more vehicles can be used simultaneously to supplement one another, as they are not mutually exclusive. Families may have many goals and objectives for their philanthropy and the use of both a charitable entity and a DAF simultaneously may help to achieve all of them.  

A DAF does afford some benefits that are hard to ignore when compared to charitable entities, especially in terms of ease of administration, anonymity and its effectiveness in supporting most types of granting models. 

Given this, it is no wonder DAFs are considered a modern alternative to private foundations and charitable trusts. 

Learn more about our Philanthropic Advisory services or contact us now.