Tax-Time Tips for Setting up Donor-Advised Funds

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Clients are now meeting with their accountants to review the past year and look ahead. Charitable giving has become much more prevalent in those annual conversations as a result of the tax law changes at the end of 2017.

More accountants have been encouraging their clients to bunch their charitable contributions, establish donor-advised funds (DAF), and donate appreciated assets instead of cash. Some have suggested that their clients open DAFs to complement their private foundations, or to simply close their foundations and open DAF accounts due to the small size, complexity, responsibility and expense (not to mention that many accountants don’t enjoy preparing the foundation tax returns).

However, many accountants who recommend that their clients open DAF accounts do not indicate where they should open them, so their clients sometimes have to find a DAF sponsor on their own. Others may suggest the most prominent local or national names, and these may not be the most appropriate DAF sponsor for the clients. No one sponsor is ideal for every client.

Because it is to the clients’ advantage for their financial advisors to be involved in selecting the DAF sponsor so they can select and manage the assets in the DAF account, advisors should reach out to their clients’ accountants before they make a recommendation. Many accountants may not be aware that the advisors already have relationships with the DAF sponsors and can manage their mutual clients’ DAF assets.

If the advisors and accountants do not communicate, their mutual clients run the risk of setting up a DAF account at a sponsor that is not ideal: These risks include:

  1. The DAF sponsor’s investment options are limited or inadequate.
  2. The clients’ financial advisor may not be able to manage the assets in the DAF account or can only do so at a high minimum.
  3. Some DAF sponsors can only accept donations of limited types of assets.
  4. The DAF account cannot be passed down to future generations.
  5. The DAF sponsor may not approve the clients’ grants to different charities.
  6. There may be restrictions about how much can be granted from the fund each year, especially if it is an endowed DAF.
  7. Certain DAF sponsors at non-profits may require a large percentage of the grants to be directed back to the DAF sponsor itself, while some may require the balance at death to go to the sponsor.
  8. Fees may be high.
  9. Technology and processes may be substandard, so grants take longer to send out, online granting may not be efficient, or past grants or donations are not easily viewed.
  10. The DAF sponsor’s service team does not provide individual service to its donors unless a donor’s account is very large.