In my blog last month (Charitable Giving: Good for Clients’ Charities, Taxes and Financial Plans), I discussed the charitable planning opportunities that have resulted from the five-year bull run in the equities markets. Building on that theme, here I’ll focus on a simple strategy for achieving clients’ charitable goals—one with which all financial advisors should familiarize themselves.

Do You Know Your Clients’ Charitable Goals?

Many advisors strive to be the go-to resource for all things in their clients’ financial lives, but you just can’t be that resource unless you include a discussion of your clients’ philanthropic goals. When I assist advisors in developing financial plans, I always ask if the client has any charitable intent. Many advisors immediately say, “No, my client wouldn’t want to give away any of their money.”

Rather than dropping the subject, I tend to press a little by asking if they have a copy of the client’s most recent Form 1040. I tell them to take a look at line 19 on the Schedule A and tell me what’s there. Rarely is the answer “nothing.” 

My point, of course, is that many clients regularly give to charity, but their advisors simply assume that they don’t because they’ve never explored the issue. Keep in mind that clients don’t need to have the mega-wealth of a Warren Buffett to have philanthropic aspirations, nor do they need to worry about complicated giving strategies such as private foundations and charitable trusts. 

The Donor-Advised Fund: A Simple Choice

For clients who have been making modest annual gifts to charities from their checking account, you can help enhance their tax efficiency with a donor-advised fund (DAF). 

A DAF is a charitable account administered by a sponsoring public charity that allows the client, as the grant advisor to the fund, to make donations to qualified charities. The DAF can be funded with many types of assets, not just cash. Once the DAF is funded, the client receives an immediate income tax deduction equal to the value of the donation, and you, as the advisor, can now manage the DAF assets in line with your client’s objectives.   

Let’s look at an example.

John Smith typically writes checks totaling approximately $3,000 throughout the year in support of various charitable causes. John also has $300,000 in a nonqualified investment portfolio, which contains shares of ABC. The shares are valued at $30,000, with a cost basis of $10,000, and he has owned them for more than one year. 

Under the guidance of his advisor, John establishes a DAF and funds the account with his shares of ABC. The advisor then sells the ABC shares and reallocates the proceeds into a balanced portfolio. Now, when John wants to donate to charity, he can submit a grant request to the DAF, and the charity sponsoring the DAF will send a check to the qualified organization.

The Benefits of a Donor-Advised Fund 

How does John benefit from establishing the DAF?

  1. John receives a $30,000 income tax deduction, which he can use to offset his taxable income.

  2. When the ABC shares are sold, John does not realize any capital gain tax because the DAF is tax-exempt.
  3. John’s advisor can tailor the DAF portfolio for growth, based on John’s goal to continue benefiting charitable organizations.  
  4. John no longer has to make donations from his current cash flow, as he has “front-loaded” his charitable donations for the next several years.
  5. If John still wants to own ABC in his nonqualified portfolio, he can repurchase the shares at a higher basis. This may reduce the amount of capital gain to be paid in the future or provide an opportunity for tax-loss harvesting. 

This is a simple example of how you might incorporate a DAF into your clients’ financial plans. If you aspire to provide your clients with comprehensive financial planning, be sure that you include charitable giving goals in your discussions. You might be surprised to learn how many clients care about this topic. Stay tuned to learn about additional strategies that you may find helpful in your planning practice.