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Though there are 1 million donor-advised fund (DAF) accounts in the country, many clients are still not aware of how they can help them in their desire to support the charities and causes that are important to them. Advisors do a good job of explaining the tax advantages of DAFs to clients, yet clients do not always immediately follow their advice since they want to understand the other benefits.
The advantages have never been more evident than in the past few years when DAF donors increased their grants to provide badly needed support to non-profit organizations during the COVID pandemic. Many clients have opened DAF accounts to give now and in the future.
Since many clients who should open DAF accounts have not yet done so, it is often helpful for them to hear why others have opened accounts and how they use them. These include:
- Clients only need to keep the one tax receipt letter from their donation to a DAF sponsor instead of previously having to retain (and find!) all the letters from the charities they support. It’s also easier for them and their advisor to donate stock to just one DAF sponsor instead of to numerous charities.
- Many donors do not want to grant a large amount to one charity at one time, so they instead donate to a DAF and grant it out over time to the charity. This is true often when the grantee has a small budget or if the donor is concerned that a charity’s mission or leadership may change soon after they were to make an irrevocable one-time large donation.
- Clients whose income or bonuses can vary substantially from year to year may donate to a DAF account when their income is high. This will enable them to continue to make grants of consistent amounts from their DAF account in the future, even when their income or investments drops in value
- Many clients create and contribute to a DAF account in the years leading up to retirement, since the tax deduction will be more significant when their income is higher than if they donate to the DAF during retirement. This will enable them to continue to make generous grants during retirement, and the assets in their DAF account grow tax-free and can often be managed by their trusted financial advisor.
- DAF donors sometimes bunch their donations to their DAF accounts every several years, with some then taking the standard deduction in subsequent years when they don’t contribute
- Donors enjoy getting the tax deduction upfront and then granting on their own timetable. This is especially helpful to donors who do not yet know where to give, though nearly all donors begin to make grants soon after they establish their DAF account.
- They want to include their family in their charitable giving decisions during their lifetime, continue the family’s philanthropy after their deaths, pass down family values, or create a charitable legacy. Establishing a DAF provides a framework and makes it easier for them to do so.
- Donors occasionally want or need to make grants anonymously for security, privacy, or religious reasons and DAFs are the only way to assure this.
- Some donors with private foundations may be overwhelmed by the responsibility, cost, and administrative burden of operating the foundations and are looking for a simpler option that accomplishes the same goal with greater tax advantages. Others may open a DAF to complement their foundation.
- Clients who sell a business or other highly appreciated asset, receive an inheritance, or have another liquidity event, often donate all or a portion to the DAF that can fund their giving for many years.
- Clients donate illiquid assets to DAFs since many individual charities are unable to accept these. These include privately held company stock, cryptocurrency, real estate, and limited partnerships, and donors receive a deduction for the fair market value (vs. cost basis for private foundation)
- Clients increasingly name their DAF as the charitable beneficiary of their IRA so the entire amount can used for future giving
