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One of the biggest benefits of attending the recent Heckerling conference was meeting with the leading estate planning attorneys and wealth advisors, and hearing about their conversations with clients about charitable giving and planning.
Many advisors told me that one of the biggest benefits of the 2017 Tax Cuts and Jobs Act was that last year, clients and their tax, legal, and financial advisors discussed charitable giving more than ever before. Clients wanted to understand the implications of the tax law changes. Consequently, because these conversations took place earlier than usual and throughout the year, more donor-advised fund (DAF) accounts were opened and funded sooner. The size of the accounts that were created and the additional donations to already-established accounts increased substantially. Christopher Hoyt, professor of law at the University of Missouri (Kansas City) School of Law, stated in his Heckerling presentation what many others have said, “This law was the best thing to happen to DAFs.”
Like many of the other leading DAF sponsors that recently released 2018 results, American Endowment Foundation (AEF) also experienced a significant increase in grants to charities, but AEF also was fortunate to have a big increase in the number of new DAF accounts and donations to both new and existing accounts.
I was party to many conversations about “bunching” donations, but the advisors who helped their clients establish DAFs at AEF did not just bunch and increase donations to exceed the new higher standard deduction of $24,000. “Bunching” refers to donating several years of donations at one time and taking a higher deduction in that year, and then not donating and taking the standard deduction in the other years. Even though clients may have initially read about and talked with their advisors about bunching and funding smaller DAFs, in the end they often created larger DAFs.
Bill Hair, an advisor with Bernstein Wealth Management, said that, “Although bunching charitable gifts has become much more popular since the Tax Cuts and Jobs Act, we have been having conversations about bunching for many years. Taxpayers with unusually high income years, or those who realize large capital gains, have long benefited from accelerating charitable gifts they had planned to make over time. Many of our wealthy clients have taken advantage of DAFs to facilitate the bunching of their charitable gifts in years when they sell stock, real estate or business interests.”
Advisors told me that this trend will continue this year, as these large donations will be the basis for clients’ grantmaking for the next five, 10, 50, or 100 years. One of the key benefits of DAFs is that when there is market volatility, or if donors’ income drops in the future, they will still be able to continue to provide consistent support to their favorite organizations. Since they already funded their DAF accounts, they will not have to reach into their wallets or donate stock from their investment portfolio, since they’ve already set aside these charitable dollars to give away in the future.
A number of advisors at Heckerling said that when clients see their tax returns this year, they will be surprised that the amount they have to pay will be larger or their expected refund will be smaller than expected. This will lead to additional conversations about bunching and whether opening DAF accounts would be appropriate. Though many new accounts were opened and funded this past year, some clients did not follow the advice of their advisors to open a DAF last year.
Halsey Schreier, a senior wealth strategist with CIBC Private Wealth Management (formerly Atlantic Trust), said, “Many clients may not fully appreciate the impact of the 2017 Tax Act and the loss of a number of itemized deductions until they receive a tax bill from their accountant or tax advisor in a few months. Because of the increased tax burden, some clients may look for ways to increase deductions - one potential solution is to open and fund a DAF.“
Though the markets dropped significantly at the end of 2018, very few advisors said that this impacted their HNW clients’ year-end giving. Some smaller donors may have changed their giving plans, but this was not widespread, since donors give generously primarily because they want to support their favorite organizations.
These Heckerling conversations confirmed that 2019 will again be a busy year for DAF sponsors. The Lilly Family School of Philanthropy just released a report in which they projected that charitable giving would grow by 3.4% in 2019 and 4.1% in 2020.
Attorneys and CPAs are recommending that their clients open DAFs, but often are leaving it up to the clients to find a DAF sponsor. Without direction, the clients could open a DAF at a sponsor that is not ideal. Financial advisors should reach out to these other professionals and let them know that if they recommend that their mutual clients should open DAFs, then the financial advisor should be included in this discussion so they can recommend an appropriate DAF. This will allow the advisor to manage the assets in the account, which is beneficial to both the advisors and the clients.
Ken Nopar is the senior philanthropic advisor for the American Endowment Foundation, the country’s leading independent donor-advised fund since 1993 with over $2.75 billion in assets. AEF works with donors and their wealth, legal and tax advisors in all 50 states.
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