The global pandemic and ensuing economic slump have put clients in one of two camps: the newly unemployed who need coaching, and those who are on financially solid ground and want to give back. For the latter group, donor advised funds (DAFs) are hands-down the most efficient way to give.
A DAF is a charitable giving structure in which donations of cash or property are deductible in the year in which they are made. The proceeds are typically invested among a selection of mutual funds with minimal fees. Your clients can put their money to work through nondeductible grants to qualified charities whenever they choose.
Unbeatable Tax Advantages
With a DAF, clients can deduct the full value of the donated securities and/or property in year one and avoid having to pay capital gains tax on appreciated assets. The money in their DAF grows tax free indefinitely.
Daniel Kramer of Kramer Financial Group in New York City describes the appeal of DAFs for tax management.
“Several of my clients use a ‘bunching’ strategy where they put two or three years’ worth of charitable gifts into one year, and then give out of that over the next few years while taking their standardized deduction,” explains Kramer.
For a bunching strategy to be effective, the amount of the client’s concentrated donation should exceed their standard deduction ($12,000 for individuals, $24,000 for married couples filing jointly), enabling them to itemize in year one. Bunching can be especially useful in years in which a client receives a windfall that would bump them into a higher tax bracket.
DAFs as a Family Foundation
Advisors who help clients establish a DAF have an opportunity to build the relationship not only with clients, but also with their clients’ children. With $59 trillion expected to be handed down to millennials and Gen Z in the coming years, cultivating relationships with the next generation has become that much more important. Bringing multiple generations together around the family’s charitable giving plans is a great way to build relationships with family members you might not know well.
Kramer suggests viewing a client’s DAF as their family foundation and a way to engage clients’ children in charitable giving. Involving children in decisions around how the money gets put to use can be a way to pass down family values and give younger kids a vision for making a positive impact in the world.
As an advisor, your ability to provide an impactful charitable giving strategy in a year in which needs are so great is a win-win for your client, the philanthropies they support, and your practice. To find ideas for reputable charities, visit www.charitynavigator.org.