Some of the specific factors why advisors suggest that their charitably inclined clients create donor-advised fund accounts at this time include:
- The client needs a tax deduction now but is not able to decide before year-end which charities to support.|
- The client has significant income (or will receive large year-end bonus) and wants to set up a charitable giving.
mechanism that will enable him or her to provide consistent level of giving in future when income may be less (e.g., an executive approaching retirement or business owner with fluctuating income).
- The client has appreciated asset to sell (or no longer wants or needs) that can be donated to a DAF or other charity (for example. privately-held C or S corporation stock, real estate, insurance, vacation home, LP or LLC interests, etc.) and avoid capital gains tax. Often these donated illiquid assets become liquid assets that wealth advisors can control.
- Advisors can now manage clients’ DAF assets, with some DAF sponsors including American Endowment Foundation (AEF) at any amount, Fidelity and Schwab at $250,000 minimum, and community foundations and other sponsors typically at higher minimums. Clients want their advisors to be able to invest and manage these charitable assets.
- It’s easier for the advisor to give shares of appreciated stocks to one entity like a DAF, rather than give shares to many different charities the client supports. From a DAF account, the client can grant exact amounts to charities.
- The client has complex asset to donate to a charity but the charity does not have the ability or expertise to accept. A number of DAFs can accept these.
- The client has a large asset to donate but would be difficult to separate and donate to different charities. DAF can accept and client can then make grants to separate charities.
- The client has a large asset to donate but wants to give it to one charity over time instead of all at once. Donating the asset to a DAF allows the client to determine the giving timetable and get the entire tax deduction now.
- Clients may receive greater tax benefits from donating some assets to a DAF rather than to their private foundation (PF). A client can also make anonymous grants from DAF.
Increasingly, clients who have a private foundation are opening DAFs to operate alongside their PF. Some clients fulfill PF’s 5% mandatory payout by donating to a DAF.
- Clients may want to close their private foundations because they’re too small, too expensive or too complicated. A DAF can do nearly everything a PF can, though PFs are still appropriate in many instances.
- The client is disorganized, can’t keep track of donations during year, makes tax-inefficient donations by check and credit card and needs a simple solution.
- The client is together with family over the holidays and wants to create a charitable vehicle that can continue to unite the family for many years.
It often makes sense for clients to give directly to their preferred non-profit organization(s), but donor-advised funds are often an ideal solution for many clients.
DAFs can accept donations of simple or complex assets, can make life easier for donors because past grants can be viewed and new grants can be made online, and they even provide just one tax receipt at year-end for donations during the year. Donor-advised funds are often viewed as a win-win-win for the clients, advisors, and the charities that the clients support.