Donor-advised funds: models of efficiency

Mark Zuckerberg is the one to thank. In the last days of 2013, the Facebook co-founder and his wife Priscilla Chan donated 18m Facebook shares worth nearly $1bn to a donor-advised fund (Daf) called the Silicon Valley Community Foundation, shining a spotlight on a scheme that was formerly little known — in the UK, at least.

Dafs are not new. Described by Guy Simonius, head of wealth and tax planning at Julius Baer, the private bank, as “an efficient way to irrevocably donate money for charitable purposes”, they have been a useful means of tax-efficient giving for US families since 1931.

“In the US, people are opening Dafs at a rate of three to one, compared with setting up their own charitable foundation, whether paying in $20,000 or millions,” says John Canady, chief executive of National Philanthropic Trust UK, a Daf manager.

Billions of dollars have been flowing in: US Dafs’ charitable assets under management had grown from $32bn in 2007 to $71bn by the end of 2014, according to the NPT.

The UK is a little way behind. NPT’s UK office, set up at the end of 2013, has raised just £5m from UK donors, while the UK Charities Aid Foundation (CAF) has run Dafs and Daf-like funds since the 1970s and has 2,800 donor-advised funds on its books, with £800m of assets under management. Investment bank UBS puts its latest total at SFr60m ($60m).

Traditionally, philanthropists have established foundations or charitable trusts. But the structure of a foundation means that while the family has great freedom over where the funds are invested, they and the trustees must also bear the burden of administration, due diligence and compliance.

“Unless it is professionally managed and staffed, with the help of a clear strategy, an autonomous foundation often proves demanding to run for a donor,” says Luc Giraud-Guigues, secretary-general of Switzerland-based Fondation Philanthropia, an umbrella foundation. “Also, in the context of low financial return, a foundation whose fiduciary responsibility is to preserve capital for the mission decided by its founder will need sizeable capital to function and provide meaningful support to society.”

Setting up a Daf also involves less paperwork. “I’ve met several clients who set up a trust and ended up feeling a bit put out when they realised they could have had a donor-advised fund instead,” says Tom Hall, head of philanthropy services at UBS Wealth Management. “A full charitable trust could take three to nine months to establish, together with fees of upwards of £2,000. But we can open a Daf for our existing clients within a week or two at the most.”

Dafs are not just for billionaires either. Many firms in the US will set up a Daf for $5,000. The UK CAF’s average starting value is £10,000 and while it has 100 client accounts in excess of £1m each, with the largest at £50m, the average fund is £250,000.

Another attraction of Dafs is that investors can put nearly anything in them. For years, the ability to donate shares to these schemes has been a big draw for US investors, and has become more popular in the UK since former chancellor Gordon Brown introduced charitable tax changes in 2000.

This is not pure altruism but sensible planning: rising stock markets and share values create potential capital gains tax liabilities, but donating shares results in a reduction to an individual’s CGT bill.

Cash and shares are the assets most commonly held in a Daf, but portfolios are often laden with interesting alternatives, such as cars, land, fine art or wine. The CAF says such assets could be put into these schemes too. The flexibility lent by Dafs might be useful for parents, who can make an irrevocable donation of valuable items to prevent future squabbles over inheritance.

The structure’s anonymity also makes this type of fund more appealing than a publicly registered family foundation if donors do not want the world to know the family silver has been earmarked for WaterAid, for example. “Sometimes prominent families appreciate the ability to be discreet,” explains Canady.

This may be why some people have criticised the scheme. In April 2014, Marc Benioff, chief executive of business software company Salesforce, himself a billionaire philanthropist, questioned the use of Dafs in an interview with San Francisco Magazine: “Silicon Valley Community Foundation is a bunch of Dafs. You give your money to SVCF and get your tax write-off for the year, but [the foundation] has no obligation to administer that money. Where’s [Zuckerberg’s money] gone? What good is it doing now?”

True, Daf accounts often hold donations for an indeterminate period. Disbursement is at the discretion of the founders or their successors. “A donor can hold a Daf in perpetuity and pass it on to the next generation,” explains Stefan Velvick, senior private client manager at CAF Philanthropy, a division of the UK foundation.

But hesitation to apportion money is not the same as reluctance: a donor may not yet know exactly where they want their donations to end up. They only know they wish to give charitably and tax-efficiently. Therefore, a Daf can provide an ideal vehicle to swell a war chest for eventual allocation.

Once donated, money in a Daf may not be reclaimed — it is earmarked irretrievably for charitable purposes. “Once it comes to us, it belongs to the charity,” points out Keziah Cunningham, senior advisory manager at CAF Philanthropy. “We see a huge variation among donors about how they want to use their Daf, but it has to be for charitable purposes, as long as these pass our robust validation process.”

With their flexibility, anonymity and tax efficiency, could these schemes ever replace foundations? Not for everyone, thinks Canady. “Some people might be fed up with the compliance and choose to close their charitable trust, but others might prefer to have the family foundation and the complete control and discretion this brings,” he says.

Not every benevolent billionaire wants complete control over their charitable giving. It is no surprise, therefore, that Dafs are gaining in popularity with affluent altruists on both sides of the Atlantic.