Charitable Trusts and DAFs: What’s the Difference?

The two most common charitable structures used by private clients to pursue their philanthropic goals are donor-advised funds (DAFs) and charitable trusts or foundations. DAFs have become the UK’s fastest growing philanthropic vehicle, thanks in large part to their simplicity, efficiency and immediate benefits. Here are some of the main differences between the two:

 

Structure

• A DAF is a philanthropic fund established at an umbrella sponsoring charity, like NPT UK, that administers the fund for the donor. The donor contributes to the DAF and recommends grants to charitable organisations over time. A DAF is not an independent legal entity.
• A charitable trust or foundation is a separately registered legal entity, dedicated to charitable purposes. Charitable trusts or foundations have an independent Board of Trustees.

 

Establishing the structure

• It is simple and relatively inexpensive to establish a DAF. DAFs have low, ongoing administration fees with no set up costs. They can usually be established within 48 hours.
• Setting up a foundation or trust can take several months as it requires Charity Commission and HMRC approval. Establishing a foundation or trust also involves start-up and ongoing legal, accounting and administrative expertise and fees for those overseeing the charitable entity.

 

Charitable fund administration, grantmaking and reporting

• With a DAF, all required regulatory processes and reporting are handled by the sponsoring charity (like NPT UK), including grantee due diligence. Donors at NPT UK have online account access to manage their DAFs and make their grant recommendations; NPT UK takes it from there. NPT UK also handles the additional due diligence required for international grantmaking, enabling donors to contribute to organisations nearly anywhere in the world.
• For a foundation or trust, all accounting and legal documentation is the responsibility of the Trustees, including annual report filing with the Charity Commission and Companies House. The foundation’s Trustees are also responsible for the legal due diligence of grantees, including the enhanced due diligence for international donations.

 

Investment

• NPT UK offers a selection of pre-approved investment options, including impact investments, to help donors grow their DAF funds before they are granted out. DAF donors recommend how their DAF assets are invested, and for higher value DAFs, donors can recommend the investment manager of their choice.
• Foundations or charitable trust Trustees must provide the investment expertise needed for their funds and regularly consider diversification of investment portfolios, which may result in an obligation to diversify a concentrated gift.

 

Anonymity and privacy

• DAF donors can choose to recommend grants anonymously from their DAFs. The details of an individual DAF account are not in the public domain.
• While foundations and trusts can maintain some level of privacy, Trustee names and accounts are in the public records with the Charity Commission for England and Wales.

 

Deciding between a DAF and a foundation or trust will depend on your clients’ philanthropic goals and their tolerance for administrative complexity. DAFs offer immediate simplicity, efficiency and flexibility, while foundations require more time and resources to directly operate a separate legal entity. You can help your clients determine the most appropriate giving vehicle to pursue their philanthropic goals.

To find out more about how NPT UK can help your client set up a DAF, please contact us.