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Many national and local publications, including the Wall Street Journal and New York Times, have recently published articles about why donors should establish donor-advised fund (DAF) accounts. CPAs and estate-planning attorneys are advising their clients to do the same. The Chronicle of Philanthropy just published a column that detailed why non-profit organizations may want to offer their own DAFs. Some DAF sponsors are soliciting charities to create these, even though there are compelling reasons why that is rarely a good idea for the charities.
The DAF wave shows no signs of slowing down, and because of the recent tax law changes, it continues to accelerate. There are now 300,000 DAF accounts, twice the number eight years ago and nearly four times the number of private foundations.
People who establish DAF accounts should first speak with their financial advisor, however, because what they first read about DAFs, or hear about them from friends or colleagues, or even from the universities or charities they support and offer them, it may be natural for your clients to create DAF accounts on their own.
Therefore, it is essential that advisors proactively talk with their clients to determine if a DAF would be appropriate, how much and which assets should be donated, and which DAF sponsor would be ideal since on their own, the clients may select the wrong one. If clients rushed to set one up at the end of last year (or at some other time), the advisors still can usually help transfer the accounts to a DAF sponsor that is a better fit for both them and their clients.
Furthermore, having this conversation will often enable the advisor to manage these investments in their clients’ DAF accounts, and will prevent the client from donating assets that the advisor already manages to a DAF sponsor that leaves the advisor with less to manage. Often advisors can advise clients to donate unmanaged or illiquid assets to the DAF accounts they can manage, which increases AUM.
The clients will benefit from this discussion because:
- The advisor can discuss the appropriate amount to donate to a DAF account. Some clients can donate too much while others could donate even more.
- The clients’ advisor can manage the assets with only certain DAF sponsors, so when this is not possible, the clients are forced to choose from a very limited number of funds their advisor would not recommend. In most situations, their advisor can produce greater returns which will enable the clients to donate more.
- Certain DAF sponsors may charge higher fees, may not have the experience or staff to administer the DAF properly or send out grants quickly, may not be able to accept complex assets, and may not allow the DAF to be transferred to another DAF sponsor should the donor want to do so.
- Other DAF sponsors may have significant limitations that the donors may not know about, including limits on how much they can give each year to their favorite charities, a required percentage that the donors need to grant to the DAF sponsor itself during lifetime (often 50% or more), and rules that do not allow accounts to be passed down to successor advisors after the creator’s death, resulting in the entire balance being distributed to the DAF sponsor.
While many CPAs and attorneys are providing wise advice in recommending that clients establish DAF accounts, many do not advise them to consult their financial advisor. Instead, they may just recommend a local or national DAF sponsor that may or may not be appropriate, or often may just tell a client to find a DAF sponsor on their own. Because nearly every article and many advisors are advocating “bunching” donations this year so their clients can itemize deductions in amounts greater than the now-increased standard deduction, the number of new DAF accounts and the sizes of donations to them will increase substantially.
Consequently, because more will be donated this year, the decision to select the most appropriate DAF sponsor is even more important. And, because advisors now have the ability to manage the assets in their clients’ DAF accounts at various minimum levels from $10,000 (American Endowment Foundation) to $250,000 (Schwab and Fidelity) to $1,000,000 (some community foundations), it is important for the advisors to identify a sponsor that will enable them to do so. Many of these DAF accounts will grow substantially over time, so even small accounts that may seem initially insignificant to advisors may turn out to be much larger, so it is in the advisors’ best interest to be involved with every account.
Ken Nopar is the senior philanthropic advisor for the American Endowment Foundation, the country’s leading independent donor-advised fund since 1993 with over $2 billion in assets. AEF works with donors and their wealth, legal and tax advisors in all 50 states.
Read more articles by Ken Nopar
