Ahead of Giving Tuesday, structure and strategy are forming a smarter piece of the picture, says John Canady
We’ve all heard of Black Friday and armageddon via retail sales but have you heard of Giving Tuesday (1 December)? It’s a global campaign to encourage us all to donate our time, money or voice to a charitable cause.
This week the National Philanthropic Trust (my organisation) produced its annual review of American’s charitable habits. And the good news is that it is on the rise. What’s interesting in the U.S. is that people are giving in new ways: a more structured and strategic approach than the janitorial random cheques to a variety of causes. One vehicle that has made this possible is the popularity of a Donor Advised Fund (DAF). It’s basically a charity savings account which acts like a foundation or trust – but you don’t have to be a multi-millionaire to have one.
It’s the fastest growing “giving” vehicle in the U.S. – and its popularity was possibly heightened when Mark Zuckerberg put $1 billion into one last year. We (NPT) are the largest independent provider of donor advised funds in the U.S. and we set up in London just over a year ago. Many people, wealth and tax advise rs included, don’t know much about these accounts but as the profile increases, I fully expect to see DAFs to gain popularity and growth because they are tax efficient, easy to set up and inexpensive to manage.
Tax lawyers, accountants, and wealth managers all have a key role to play in helping clients find the best philanthropic vehicle for their needs. Many people do not expect advisers to be experts on philanthropy but to connect them to other experts and solutions. So here is a quick guide to DAFs for you (or your client)….
DAF versus Foundation
Clients can open a DAF account in a day as opposed to months if setting up their own Foundation or Charitable Trust. They choose the name of their DAF account, such as the Smith Family Foundation or The Environmental Charitable Fund. Clients then donate personal assets (cash, shares, property are common) to their DAF account and receive tax relief at the point when the assets are donated to their DAF account. Balances in the DAF account can be invested for growth. And when they are ready, donors recommend grants from their DAF accounts to charities in the UK or abroad. So, donor-advised funds provide the functionality of having your own foundation or charitable trust with none of the administrative hassle and overhead.
In the US clients now more often open a donor-advised fund rather than setting up their own foundation, with donor-advised funds now outnumbering private ones by almost 3 to 1. There is currently over $70 billion in donor-advised funds in the US, the assets of which grew by over 23 per cent last year, continuing a trajectory of double digit growth that began in 2010.
That growth is being mirrored in the UK where the vast majority of private clients have relatively similar needs – convenience and tax-efficiency.
Separate Tax Planning from Charitable Planning
When you make a contribution to a DAF, you receive immediate tax relief. Your DAF account benefits from a 25 per cent Gift Aid reclaim on eligible cash contributions and you may claim tax relief for a portion of your contribution on your Self Assessment tax return. The key is that you can make contributions before you have decided which charity will ultimately receive the funds. You have time to decide where to send the charitable contribution.
Because you receive immediate tax relief on your contributions to a DAF, they are often the preferred philanthropic vehicle following a big liquidity event, like an IPO, selling a business, or receiving an inheritance.
Donate shares not cash – avoid CGT
For those with appreciated shares in the their investment portfolios, it can be much more effective from a tax perspective to donate appreciated shares rather than cash. When you contribute appreciated shares to a DAF, you receive tax relief on the full market value of the shares on your Self Assessment tax return. By donating the shares, you also do not have to pay capital gains tax. Donors can effectively make more generous charitable gifts because the charity receives the amount that would otherwise go to taxes. In other words, DAFs allow you to unlock assets, like shares, for charitable good.
Pursue Investment Growth Opportunities.
DAFs typically offer a variety of investment options. By investing the balance in your DAF account, you will ultimately have more to give away to charities in the future.
At the end of the day, giving is about discovering what is most meaningful to you and translating that into action. Donor-advised funds can be a very useful tool in that process.
John Canady is CEO of National Philanthropic Trust UK. NPT-UK is affiliated with National Philanthropic Trust, the largest independent provider of donor-advised funds in the United States.