Begin your legacy with a donor advised fund

As the UK’s fastest growing philanthropic vehicle, donor advised funds offer an attractive alternative to giving directly or to setting up a personal or family charitable foundation.

In short, a donor advised fund provides a cost effective and flexible way of donating to selected charities either in the short term or over many years to come.”

Despite what you may see in the news, it turns out that we Brits are a generous bunch. The level of charitable giving by UK households has increased from £9.6bn in 2016 to a whopping £11.3bn in 2020 and this trend is expected to continue.

An increasing number of individuals are becoming interested in how their wealth can make lives better beyond their lineal descendants. To this end, they may consider establishing their own charitable foundation to which they can donate – either during their lifetime or as a legacy in their will. However, the prospect of establishing your own charity can be a daunting one.

This involves significant administrative and reporting requirements for the donors and trustees. Generally, this comes with associated costs and this cost and time burden can act as a major barrier to an individual’s philanthropic goals. This is where donor advised funds (DAF) come in.

A DAF allows donors to give in a way that is flexible and tax efficient, provide the freedom to give to multiple causes and offer a chance to involve the family in gifting beyond their lifetime. It replicates most of the benefits of setting up a charitable grant making trust but with significantly fewer administrative, fiduciary and reporting requirements for the donor, as these are dealt with by the DAF.

Gift

A DAF is a registered charity eligible for Gift Aid and other appropriate tax reliefs. The tax relief arises as soon as the donor makes their gift into the DAF, even if that gift is not immediately passed on to a charity. A key point to note is that once gifts are made to the DAF, they are irrevocable and the donor cannot then get their gift back.

Grow

The money gifted by the donor can remain in the DAF until they advise that they wish to distribute it to the chosen charity.

The donor can opt for an investment strategy for the funds they have gifted to the DAF which ties into their wishes for the fund – be that to provide annual grants in perpetuity or to deplete the fund over a certain period, or many years to come.

Grant

When ready to make a gift, the donor advises the trustees of the DAF who they wish to make the gift to. This is advice and the trustees are not obliged to follow it. In practice, the trustees will happily pass gifts on to any UK registered charity unless there is a compliance issue (e.g. if the charity concerned was subject to criminal investigation, the trustees might need to wait before acting on the advice). The DAF is responsible for all due diligence and correspondence with the charity and the original donor may, if they wish, remain anonymous.

Putting it into practice

Let me introduce you to Alan and Sue. They are in their late 60s and retired after having held successful careers in the pharmaceutical industry. Although they had high incomes, they have always been very frugal with their expenditure. As such, they have accumulated a large estate. Alan and Sue never had children of their own, however, they do have nieces and nephews, who they think a lot of. Having worked with Equilibrium over many years, they have established a portfolio and income strategy that allows them to live the life they want – to the point that any further expenditure would actually make them feel uncomfortable.

What’s more, as part of their inheritance tax planning, they have helped their nieces and nephews feel financially secure.

In their annual meeting with Equilibrium, they asked their adviser: “What next?” They wanted their wealth to result in a long lasting and powerful legacy and their planner asked for their views on charity and philanthropy.

Both Alan and Sue came from lower income backgrounds and felt it was the opportunities they had in their education that allowed them to get to the position they are in. They also know many people who didn’t get the opportunities they did. As such, they were keen to support charities in this sector but with a particular focus on smaller, regional charities. However, they didn’t know which charities to support or the best structure for doing so.

Their Equilibrium planner introduced the prospect of a donor advised fund and arranged a meeting to introduce Alan and Sue to Andrew Evans – a philanthropy adviser with ‘Think Philanthropy’ – to explore potential good causes.

In short, a donor advised fund provides a cost effective and flexible way of donating to selected charities either in the short term or over many years to come.