Grant making charities needn't cost so much to run

Grant making charities needn’t cost so much to run.

The reason that most people get involved in philanthropy is to be able to focus on making the world a better place and advancing the philanthropic mission of the fund they are engaged with. They don’t do it to get bogged down in governance but good governance is vital if philanthropy is to be effective..

The burden of running grant making charities continues to grow with trustee’s precious time increasingly being taken up by regulatory compliance and more of the trusts limited financial resources being spent on non charitable activities such as legal, secretarial, audit and accounting costs.

There are also increased fiduciary duties being placed on charity trustees with all the legal jeopardy this involves.

Setting up new stand alone grant-making trusts is expensive and it is taking much longer to get recognition as a charity from either the Charity Commission or OSCR, without which none of the tax advantages of being a charity accrue.

However there is a great way to reduce both the governance burden and the regulatory compliance costs which it is worth both trustees of existing charities and philanthropists wanting to set up grant-giving charities considering.

For many year in the USA philanthropists have channeled giving through vehicles known as Donor Advised Funds (DAFs). They are also now one of the fastest growing types of charitable fund in the UK. They could be the answer to all these problems.

What are they and why don’t we use them more often?

What exactly are they?

A DAF is a stand alone charitable fund under the umbrella of a larger fund of funds which itself is a registered charity and which manages the fund on behalf of either the donor, or in the case of a charitable trust which has become a DAF, on behalf of its trustees.

As a minimum the umbrella fund takes care of all accounting and audit compliance with all the advantages and benefits that their scale can add resulting in significant cost savings. They also ensure that the fund operates legally, protecting the trustees from legal threats.

In some cases the DAF operators can also take on administration of the grant making process itself further reducing administrative costs.

The trustees retain control over the mission and strategic direction of the DAF and also of how funds are distributed. They can also retain control over how the DAFs funds are invested.

Why are they so effective?

Within reason the DAF can be called whatever you want and transferring an existing trust to a DAF doesn’t necessitate changing the trust’s name. Provided the existing trusts constitution allows, converting to a DAF is a very simple process.

DAFs can be set up very quickly. The umbrella charity already exists so all that is needed is for its own trustees to be satisfied that your fund meets their criteria and the transfer can be made.

There is no maximum, or perhaps more importantly minimum size for a DAF. Because audit and accounting fees are shared across the whole of the umbrella fund so DAFs are ideal for smaller sums.

This feature can make DAFs ideal vehicles for annual grant giving. For example a business much decide to donate 10% of its profits every year to charity. If it does this to its own DAF it can then engage much more effectively with the causes it believes in and make multi year commitments to ongoing programs. Much better for the donor and much more effective for the recipient.

Finding the right DAF provider that suits you is important. Both the charitable sectors you want to engage with and the amounts you want to give are factors. Some expect you to use their investment services and if you are happy with this their costs may be even lower. Others give you much greater flexibility allowing you to integrate your charitable activities with the rest of your wealth planning.

So in conclusion DAFs offer significant cost savings. For example a stand alone grant giving charity distributing £50,000pa could easily be facing audit and administrative costs of 10-20% of that sum, money that could otherwise be doing good. Using a DAF it is possible to significantly reduce this cost.

DAFs offer greater flexibility, legal comfort, easier administration and simpler reporting requirements whilst retaining all the advantages of stand alone grant giving charities. Well worth thinking about if you run one.