This article was provided by and expresses the views of Nancy Bikson, Managing Director at Chapel & York, a partner firm of the Beacon Gainer private client advisory services group.

For a number of years philanthropists have had an increasing number of choices when deciding how to structure their giving.  The focus lately has been on the ways to give – a straight donation, impact investments, a hybrid, and so forth.  But no matter what the type of giving, there needs to be a legal structure which the donor uses to organise charitable giving tax-effectively.

In most countries there are two basic options – to set up your own dedicated legal entity(ies) and/or to have a fund with an existing charitable organisation.  The latter option, usually called a Donor Advised Fund, has become very popular over the past years with over £9 billion held in DAFs in the US alone.

The following is a basic rundown of the pros and cons of each option. It isn’t an exhaustive list, and it doesn’t deal with specific issues of specific countries, but it is a general guide.

Setting up your own Dedicated Entity has a number of advantages:

  1. It is your entity and, subject to local restrictions, able to be used as you wish to achieve the desired results.
  2. You can have your family, your friends, your colleagues on the Board of the entity.
  3. The entity can be named as you wish, subject to local restrictions and laws.
  4. You can make grants when and as you desire, subject only to legal requirements for making certain amounts of gifts and the types of organisations which can be supported.
  5. The entity will live as long as desired by you, your family, your company. It is not dependent on the existence of another organisation.

It also has a number of disadvantages:

  1. In the first instance it may take a long time to establish the entity.
  2. The organisation will be subject to all local laws, rules and regulations, which carries a sizeable compliance burden.
  3. The entity will have to make whatever annual and periodic filings are required.
  4. As laws change in a country, an entity will have to follow all new laws. This may mean enhanced reporting, additional policies, new filings, and a requirement to keep abreast of such changes
  5. The organisation will need a bank account, which in some instances can be difficult to obtain and in some cases again, may be difficult to maintain.
  6. Your organisation may be subject to enhanced regulations in countries which differentiate between grantmaking foundations and operating charities.
  7. The entity will be subject to all Know Your Donor, Know Your Grantee and other money laundering regulations.
  8. The Board is legally responsible for all activities.

A Donor Advised Fund, on the other hand, is not a separate legal entity.  It is a fund within an already-established charity.  The fund is created by an individual, family, group or company to receive funds and give them away as desired. Monies are paid into the fund, invested by the charity and given away.

There are a number of advantages:

  1. There are no regulatory issues to be met because that is all done by the underlying charity.
  2. No bank account is necessary.
  3. No board is necessary.
  4. The underlying charity is responsible for all money laundering, Know Your Donor and Know Your Grantee work.
  5. No need for you to keep up to date with all legal requirements – all that is done for you.
  6. The invested funds may attract a better rate of return, since they will be part of a larger investment portfolio.

As with anything there are a number of disadvantages:

  1. Your fund is subject to the rules and regulations of the overarching charity with which it is lodged.
  2. Your fund is reliant on the underlying charity to manage itself in a professional and appropriate manner.
  3. There may be restrictions placed on your fund in terms of when grants are made and to whom.
  4. There may be restrictions placed on the name of the fund and who can suggest grants from it.
  5. If the underlying charity is wound up, you may have issues related to your fund which are beyond your control.

There are no correct answers for a particular client/donor/philanthropist but hopefully the above discussion will help raise points for discussion.

May 2021
Nancy Bikson
Chapel & York