In July 2019, before the world had heard of coronavirus and the way in which we worked and lived was turned on its head, I wrote for this publication on the role of the UK in international philanthropy.
The piece[i] looked at the UK’s long history of philanthropic activity and the continued attractiveness of the UK as an international philanthropic centre. I discussed the regulatory environment in the UK and the level of administration, formality and disclosure involved with establishing and maintaining an English charitable structure and the role that tax reliefs might play in philanthropic structuring.
To recap, I outlined that:
However, the utility and appeal of DAFs goes beyond cross-border giving and there are other reasons why they are particularly relevant for international philanthropists. This piece looks at the DAF landscape and considers why this is the case in more detail.
Dual Registered DAFs
Before turning to the wider appeal of DAFs, there is one further tax-related point to consider. Where a philanthropist pays tax in more than one jurisdiction, a dual registered DAF can maximise the tax efficiency of his or her giving. This is best shown in an example.
Sarah is a US citizen living and working in London. As a US citizen, Sarah will be taxed on her worldwide income and capital gains, irrespective of her place of residence. As a resident in the UK, Sarah will also pay tax in the UK. In general, Sarah will be protected from double tax because of provisions of the US/UK double tax treaty. However, the double tax treaty doesn’t protect Sarah’s position in respect of charitable donations. Sarah wishes to make donations to the Royal Opera House in Covent Garden (an English charity) and, following the strong tradition of philanthropy in the US, to her old college, New York University (NYU) to support students in the US. However, where she makes direct donations to the Royal Opera House and to NYU:
This mismatch can be resolved through donating to a dual registered charity. A UK/US dual registered charity comprises a US charitable company (an exempt organisation under IRS Code s501(c)(3)) and an English charitable company, limited by shares. The US non-profit company owns all the shares in the English charitable company and elects for the English charitable company in the UK to be treated as a “disregarded entity” for US tax purposes. The effect of this is that the English charity in the UK is treated as a foreign branch of the US exempt parent for US tax purposes. At the same time, the English charitable company is registered with the Charity Commission. Where Sarah donates to a dual registered charity, she will receive tax relief in both the UK and the US.
Some larger charities with significant connections to more than one jurisdiction will themselves adopt a dual registered structure to facilitate donations. However, the governance and administrative burden of operating as a dual registered structure will mean that it is not cost-effective for all but those charities with a significant portion of donors who have a tax liability in the US/UK to be structured in this way.
A dual registered DAF, of which there are several (including NPT Transatlantic and the Charities Aid Foundation’s American Donor Fund) offers international philanthropists with a dual tax liability a straightforward and tax efficient solution. Whilst dual qualified US/UK DAFs are most well-known, there are also DAFs that are qualified in other jurisdictions including in the case of Shared Impact’s DAF, Hong Kong.
In our example, Sarah could open an account in a dual registered US/UK DAF, obtaining tax relief on her donation to the DAF in both the US and UK. From that DAF account, Sarah is then able to recommend donations to the Royal Opera House and to NYU, provided that the DAF provider is comfortable with the proposed purpose of the ongoing donations.
For the international philanthropist who does not have the inclination or time to establish and administer a stand-alone foundation, a DAF may have particular appeal. Provided the scope of that philanthropist’s giving falls within the DAF provider’s risk appetite and governance arrangements, then as the administrative and regulatory functions associated with running a charity are picked up by the DAF provider, the philanthropist can consider and focus on his or her giving, without the associated responsibilities and risks involved in running a charitable organisation.
Taking our earlier example, Sarah would be responsible for making the grant recommendations from her DAF account but the DAF provider will be responsible for undertaking the required due diligence, monitoring and reporting on the use of the grant and for putting in place grant documentation appropriate to the grant itself (for example, a suitable grant agreement).
There are circumstances where a DAF will not be a suitable vehicle for international philanthropic giving – generally where a donor’s ambitions go beyond grant making or the donor wishes to be able to control certain governance decisions or make decisions around the investment of his or her funds directly (rather than being able to make recommendations).
Focus For International Philanthropic Efforts
Whilst DAFs offer particular advantages in terms of administration and tax efficiencies for philanthropists, they also have a wider and more holistic appeal for international families. In my experience, where philanthropically minded families are located across the world, a DAF is sometimes used to foster a sense of collective purpose and focus. Family members across multiple jurisdictions and generations are generally able to make recommendations as to onward donations from the same DAF account. Accordingly, the DAF is used as the focal point for international philanthropic efforts sometimes in addition to local giving that might be carried out directly by some family members.
Alternatively, a DAF structure might be used to collaborate, pool funds and co-fund charitable initiatives often focused on a particular charitable purpose or focus, for example, on health care or education.
In either case, in order to foster a sense of collaboration and collective purpose, committees can be established outside of the formal legal DAF structure to consider and make grant recommendations.
Whilst donations from a DAF account may reflect the name of a donor or another name chosen by the donor, it is also possible to make donations from a DAF account anonymously (here the donation would just be attributed to the name of the donor advised fund provider). This aspect of DAFs is also attractive to some international philanthropists who may choose to make all or some of their donations anonymously.
This function of DAFs is particularly attractive when privacy is particularly important to a donor or where he or she wishes to make some donations anonymously (perhaps, for example where they fall outside the area of focus for giving previously). It is not uncommon for families to operate a DAF alongside a standalone family foundation, each fulfilling a different function for their philanthropy.
Clarissa Lyons is a Senior Associate at Bates Wells. Clarissa advises English and international charities, not for profit organisations and philanthropists (both individual and corporate) on a wide range of charity law and philanthropy issues.