Differences Between a DAF and a Charitable Foundation — Which is Best for Your Client?

Donor-advised funds (DAFs) and charitable foundations are both philanthropic vehicles, but they operate differently. Here’s a breakdown of some of the key characteristics and differences to help you make an informed decision on which may be the best fit for your client.

Structure

• A DAF is a philanthropic fund established under an umbrella sponsoring charity, like NPT UK, that administers the fund on behalf of a donor. The donor contributes to the DAF and recommends grants to charitable organisations over time.

• A charitable foundation is a separately registered legal entity, dedicated to charitable purposes. Foundations can be funded by private sources, from an individual, a family, or a corporation, or from a variety of public sources.

Cost and set up

• Establishing a DAF is simple and relatively inexpensive. DAFs have low administration fees with no set up costs and can usually be established within 48 hours.

• Setting up a foundation can take several months as it requires Charity Commission and HMRC approval. It also involves start-up and ongoing legal, accounting and administrative expertise and fees for those overseeing the charity.

Administration and grantmaking reporting

• With a DAF, all regulatory reporting is handled by the sponsoring charity (like NPT UK), with online account access provided so donors can manage their DAF. All grantee due diligence is handled directly by the DAF sponsor, including for international grantees.

• For a foundation, all accounting and legal documentation is the responsibility of the Trustees, which includes annual report filing with the Charity Commission and possibly Companies House. The foundation’s Trustees are also responsible for legal due diligence of grantees, including the enhanced due diligence required for international donations.

Investment

• DAF donors recommend how the DAF assets are invested. As DAF sponsors operate multiple DAFs, a client’s individual donor-advised fund account can hold a concentrated position.

• Foundations or charitable trusts must regularly consider diversification of investment portfolios, which may result in an obligation to diversify a concentrated gift.

Anonymity

• DAF donors can choose to recommend grants anonymously from their donor-advised fund. The details of an individual DAF account are not in the public domain.

• While foundations can maintain some level of privacy, Trustee names and accounts are in the public records with the Charities Commission.

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Ultimately, choosing between a DAF and a foundation depends on a donor’s philanthropic goals and tolerance for administrative complexity. DAFs offer immediate simplicity and flexibility, while foundations require more time and resources to directly operate a separate charitable legal entity. Determining the most appropriate giving vehicle will help your clients make the most of their philanthropic giving. As always, NPT UK is here to help you guide your clients along their philanthropic journey.

To find out more, please contact us.

About the Author

Natalie Pinon is Executive Director, Development at NPT UK. She has over 15 years of experience working with philanthropists and impact investors to manage their giving.