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For many reasons, the popularity of donor-advised funds (DAFs) continues to grow among clients and their trusted advisors. Clients feel DAFs allow them to maximize their support for charities, advisors understand and promote DAF advantages to clients, and charities are pleased to receive more and larger grants from their donors who have established DAF accounts.
DAFs are simple to establish and use, and they enable donors to contribute simple and larger and more complex assets, such as privately held stock that most charities are unable to accept. As a result, DAF donors are typically more generous in their grants than they would be if clients donated directly to the charities.
This was especially true during the past year, as donors substantially increased their giving from their DAF accounts in response to the urgent need that existed here and abroad. While many DAF donors sent grants from their previously established DAF accounts, others opened and funded new accounts and then send out grants afterwards. The COVID pandemic caused some clients to re-evaluate their charitable and other priorities.
Some clients who have recently established DAF accounts with the assistance and encouragement of their financial, legal, tax advisors include those who:
- Sold or are selling their businesses;
- Owned highly appreciated assets they donated instead of selling and paying significant capital gains tax;
- Had an increase in wealth, realized that they had plenty for themselves and heirs, and funded their DAF accounts substantially so they had plenty to give away now and in the future;
- Were personally impacted by the pandemic or witnessed the impact upon others who were less fortunate;
- Decided to retire within the next several years, so they made large donations to their DAF while working and received a significant deduction; as a result, they are in a better position to make grants during retirement while their income will be less;
- Wanted to involve their families in charitable giving and instill charitable values in them;
- Do not have children and wanted to determine where and how much to give to charity now and later;
- Were recently divorced or widowed, especially women, who controlled more money and were typically more philanthropic than men;
- Had been frustrated with cumbersome or complex foundations and wanted a simpler and less expensive alternative like a DAF;
- Opened DAF to complement their foundation;
- Were concerned about privacy and wished to donate anonymously which is possible through a DAF;
- Felt that stocks were high and may drop, or now feel that they want to fund their accounts before possible tax law changes or pending legislation that may impact DAFs or foundations that are established in the future;
Many advisors continue to encourage their clients to establish DAF accounts for the above and other reasons. Tax benefits are not usually the driving factor behind a client’s decision to give, but help clients understand the importance of the timing so they have more to give to their favorite causes and charities.
Many clients and advisors saw how those who had established DAFs before the pandemic were in an ideal position to provide support during the pandemic, even while markets dropped in value. Now that markets are near all-time highs, and charities’ need for support remains very strong, this is an ideal time to establish and fund these accounts from which they can make grants from these DAF accounts.
Year-end account opening and granting will again be very active. Because clients who open DAFs typically want to make grants soon after the establishment of the accounts, it is important that advisors have this charitable planning conversation soon. This will help avoid situations in which clients want to open accounts and make grants late in the year, which unfortunately may not be possible when the process is started too late.
Advisors have learned that clients who establish DAF accounts remain clients for many years, even after the wealth creator dies. While the amounts in their DAF accounts may only be a portion of the clients’ overall assets that the advisor manages, they are important assets to the spouse and heirs and can help retain the family as clients.
Ken Nopar is the vice president and senior philanthropic advisor for the American Endowment Foundation, the country’s leading independent donor-advised fund since 1993 with over $5.5 billion in assets. AEF works with donors and their wealth, legal and tax advisors in all 50 states.
Read more articles by Ken Nopar
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
