DAF 101: What is a DAF and How Does It Work?

Donor-advised funds (DAFs) are growing in popularity in the UK and are increasingly used by philanthropic individuals and families as an alternative to setting up their own charitable trust or foundation.

So, what is a DAF and how does it work?

A donor-advised fund is a philanthropic fund that allows donors to make charitable contributions, receive immediate tax benefits and recommend grants from the fund over time. The fund is established under a DAF provider (an umbrella charity) that administers the fund on behalf of the donor.

How does a donor-advised fund work?

Simply put, donors contribute to the fund, let their assets grow, and then recommend grants to qualified charities. It can be broken down into five simple parts:

1. Donors make an irrevocable contribution of assets to the fund, most commonly cash or appreciated assets. NPT UK can accept a wide range of asset types.

2. The donor receives the maximum charitable tax benefit allowed for the donation.

3. The donor registers the DAF account with the DAF provider, and names the DAF account, along with any advisors to the account and any successors or beneficiaries.

4. Donors can recommend the DAF assets be invested so that they may grow tax-free.

5. The donor can now recommend grants to qualified charities almost anywhere in the world.

Why choose a donor-advised fund?

There are several benefits to conducting charitable giving through a DAF, which suit a variety of needs. The most common advantages include administrative convenience, savings, flexibility and tax benefits.

Every pound contributed to a DAF will reach a charitable cause: it is an irrevocable donation and can only be used for charitable purposes. Donors contribute to their DAF when they can and recommend grants to their favourite charities when they want to. Some choose to let their contributed assets grow in their DAF so future grants can make an even greater impact. Others choose to make grant recommendations regularly throughout the year. Whatever a donor’s preference, grantmaking through DAFs is benefiting more charities and communities in need every year.

Learn more about DAFs and philanthropic trends on our website. For further information, please contact NPT UK and our advisors will be happy to help.

About the Author

John Canady, CEO of National Philanthropic Trust UK, has 25 years of experience working across the business, nonprofit and government sectors. He specializes in creating and managing philanthropic funds for donors and family offices around the world who wish to base their philanthropy from the UK.