Which Clients Should Open Donor-Advised Funds
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Much has been written about the reasons why so many individuals, couples, and families have established donor-advised fund accounts (DAFs) in recent years. With close to 300,000 accounts, these have become by far the most popular charitable vehicle. Many clients are planning to open accounts before year-end, often because their financial advisors, CPAs, and attorneys have been discussing the tax advantages and other benefits with them.
While there is still time to establish DAF accounts this year, it is beneficial for advisors to reach out and talk with clients to determine whether establishing one would make sense. Even if it does not, having the charitable conversation now will have many short and long term benefits to the clients, advisors, and charities the clients support.
The types of clients who have established or who would be excellent candidates to create DAFs include:
- Clients who are approaching retirement (advantageous to make large donation while earning high income and can receive greater tax benefit, and then can make grants from DAF account now and in future)
- Clients who have pending liquidity event (sale of business/asset or inheriting wealth)
- Clients who have already retired or sold their business and now have time, assets, and interest to get involved with philanthropy
- Clients who want to or should sell highly appreciated securities/other assets or have assets with unknown basis
- Women, who are generally more charitably inclined and generous, now are earning more, living longer than men, and are controlling more money especially after being widowed or divorced
- Couples or individuals without children who will have to decide what to do with their wealth
- Clients who want to involve children or grandchildren in charitable planning and instill charitable values in them
- Clients who want philanthropy to continue to unite family after their deaths
- Clients with financially independent children or who do not want to leave their children too much.
- Clients who want to support their preferred causes and charities instead of leaving money to children they may not trust or who have different ideas or values
- Clients who have been impacted by emotional trigger (illness, natural or man-made disaster, travel)
- Younger clients who want to establish a baseline for giving that will grow over time or who wish to involve their young children
- Younger clients who seek a simple, efficient, tech-savvy way to make charitable donations
- Millennials or entrepreneurs who want to give back
- Clients who have been frustrated with cumbersome or complex charitable vehicles that were established previously
- Clients who seek privacy and may wish to be anonymous with some or all of their giving
- Clients who may not love philanthropy but hate government and taxes even more
- Clients who frequently ask their advisor to donate stock to many different charities (Easier for advisor to just donate to one charity)
- Clients who have difficulty keeping or finding all of the gift receipt letters from different charities they support. (DAF sponsors provide a gift receipt letter for the donations during the year).
- Older clients who want to create a charitable legacy or have an impact on causes that are important to them before they die.
Though many advisors often previously engaged in charitable-planning conversations primarily with those clients in the last category, it is now obvious that these discussions are taking place with many other types of clients.
As a result, the number of DAFs has doubled in recent years. Advisors and clients are now aware that there is no charge to establish them, they are easy for clients to use, administrative fees are minimal, amounts in DAFs grow tax-free, advisors can manage the assets in the funds at some DAF sponsors, donors can receive the maximum tax deduction at the time of donation yet make grants over time, and some DAF sponsors can accept complex assets.
Because many clients have highly appreciated assets and nearly all clients have charitable intent and make donations every year, most advisors feel that this is an ideal year for clients to create or make additional donations to their DAF accounts. Others are encouraging their clients to “pre-fund” their future charitable giving this year because of pending tax changes that may make future donations less tax-advantaged.
Since the year-end volume is anticipated to be so great again, it is critical that advisors start the conversation now so that clients have time to move forward this year. It is already late in the year but there is still time. Some DAF sponsors have already announced late November cutoffs for donations of different assets held at different custodians, while others have later deadlines. Even if clients do not open accounts immediately, this conversation will help avoid the common situation where donors ask their advisors to donate securities to many different charities on December 31. Clients, advisors, and non-profit organizations all benefit when the conversation happens early.
Ken Nopar is the senior philanthropic advisor for the American Endowment Foundation, the country’s leading independent donor-advised fund since 1993 with over $1.4 billion in assets. AEF works with donors and their wealth, legal and tax advisors in all 50 states.