Choosing the right vehicle for charitable giving: Charitable Foundation vs Donor-Advised Fund

Feature

DAF

Charitable Foundation

Setup complexity

• Simple and quick – handled by the DAF provider and minimal ongoing administrative work involved for the donor.
• Can be set up during lifetime or on death (e.g. to accommodate gifts in Wills).
• Most DAF providers will have a minimum donation amount.

• Labour-intensive and a longer-process – requires drafting a governing document, appointing charity trustees, registration with the Charity Commission and HMRC (which can take months) and ongoing reporting and accounting requirements.
• Can be set up during lifetime or on death (e.g. to accommodate gifts in Wills).

Common use

• Grant making activities to charitable organisations in/outside the UK.
• Some DAF providers can accommodate more active projects (e.g. partnership with local charities).

• Grant making or active charities.
• Can trade/employ staff.

Control

• Donors can recommend grants for the DAF to make, subject to the DAF undertaking due diligence on the recipient/use of funds.
• Many DAF providers offer philanthropy advisory services to help identify suitable grant recipients, if required.
• Donors can nominate successors (e.g. other family members) to take on this role.

• Greater level of control – the appointed charity trustees have control over the charity and its funds. However, they are still under a duty to undertake due diligence on potential recipients/projects.
• Whilst not a legal requirement, the Charity Commission may require some/majority of foundation trustees to be independent (e.g. non-family members), which may dilute some degree of control.

Costs

• Low setup costs and usually reasonable ongoing fees. Monitoring/impact of donations is undertaken by the DAF provider and typically included in the fees.

• Generally higher setup and operational costs, including legal and accounting fees, because of the high regulation of charities in the UK.

Tax benefits

• Contributions are eligible for immediate UK tax reliefs for income tax, capital gains tax and inheritance tax.
• Some DAF providers can facilitate tax reliefs in other jurisdictions (e.g. the US).

• Contributions are eligible for immediate UK tax reliefs for income tax, capital gains tax and inheritance tax – only typically available once all relevant registrations are completed (which can take months).
• Tax reliefs in other jurisdictions require further planning (e.g. setting up of sister charities/dual registration).

Investments

• Many DAF providers can set up investment accounts with most banks and can discuss investment strategy (including incorporating ESG solutions) with the donors.

• Foundation trustees to make decisions/appoint investment manager in line with charity trustees’ duties/permitted investments.

Anonymity and reputation management

• DAFs offer philanthropists the option to remain anonymous, if required.

• The names of charity trustees are published on the Charity Commission website.
• Issues affecting individual trustees or their family members may have reputational/regulatory implications for the foundation.

Management

• Managed by a third-party charity as the DAF provider.

• Requires a board of trustees to manage the charity.