How Donor-Advised Funds Can Help with Year-end Planning

IMGCAP(1)]Donor-advised funds have increasingly become the charitable vehicle of choice over the last 10 years for both advisors and clients.

They can be established very quickly, are easy to explain to clients and simple for them to use, have many tax benefits, appeal to a wide variety of donors, and there is no charge to create them. DAFs now outnumber private foundations by nearly three to one.

The end of the year is when many DAF accounts are established and when many clients contribute to their already-established DAFs. This is largely because clients: 1. Meet with their CPAs and other advisors to do year-end tax planning and discuss any recent or anticipated liquidity events;

2. Have a good idea of their expected income for the year so they can determine how much they want to donate;

3. Receive requests for donations from their favorite nonprofit organizations;

4. Feel more generous around the holidays and see stories about people in need; and

5. Gather with their families over the holidays and have discussions about many items, including family possessions, estate plans and philanthropy.

Clients benefit from talking with their advisors about their charitable planning as advisors can help them donate as efficiently and effectively as possible. These discussions help advisors deepen their relationships with clients.

While some clients know exactly what they want to do, others may just be starting on their charitable giving journey or have experienced a liquidity event during the past year.  They may not have developed deep relationships with specific charities and don’t yet know which they want to support.

Donor-advised funds enable advisors to help these clients feel less pressure to make hurried giving decisions at the end of the year, while still allowing them to receive the maximum tax benefits from their donation to a DAF.

It is important to note that studies from U.S. Trust and other sources have repeatedly shown that very few donors decide to give primarily for tax reasons and would continue to donate even if the tax benefits were reduced or eliminated.

DAFs can be a very useful solution for CPAs and other advisors when they encounter these client situations or preferences, especially at the end of the year:

1. Clients have had a very high income year or have sold (or are anticipating selling) an asset that will generate a large capital gain. These clients could donate more to a DAF this year so they will have enough to give during future years in which adjusted gross income may be substantially less.

2. Clients may wish to donate an asset that is not easily divided to a number of charities. A DAF can accept the donation and then make grants in the exact amounts that clients want.

3. Clients may want to donate an asset (such as land, insurance, privately held or publicly traded stock) that a charity is unable or does not have the expertise to accept. Some DAFs have a great deal of experience in accepting these types of assets.

4. Clients can’t keep track of donation receipt letters from different nonprofits, or they unintentionally make numerous donations to the same organizations each year. A DAF provides one tax receipt letter each year and often allows for online viewing of past grants.

5. DAFs “allow the taxpayer to determine when the charitable deduction is claimed, which can be different from when the funds are sent to the charity,” according to Mark Miller, a tax partner with Sikich LLC.

6. DAFs “help facilitate the donation of appreciated long term capital gains to charity which allows taxpayers to purge inherent, unrealized gains,” Miller added.

7. Clients want to provide funding to a charity over time, possibly because a large gift could overwhelm the charity or the client wants to see the ongoing impact of the gift.

8. Clients want to give anonymously or outside the stated mission of their private foundation, or establish a DAF to work alongside their private foundation.

9. Clients feel frustrated with operating their private foundation. Dawn Jinsky, a partner with Plante Moran Wealth Management, stated, “Although my clients like the concept of a private foundation, they are looking for a simpler solution with comparable capabilities.”

10. “Clients are looking for a way to create a legacy and engage family in wealth discussions, and philanthropy is a great starting point to this conversation” Jinsky added.

11. Clients may be looking for a simple charitable giving solution for their companies, as there are now numerous corporate DAFs.

12. Advisors often know which of their clients call them at 4 PM on New Year’s Eve to request that they transfer appreciated stock to a charity. Establishing a DAF earlier will enable clients to go online to request a grant from their DAF and enable their advisors to enjoy their New Year’s holiday.

Clients can often benefit if CPAs, attorneys and wealth advisors collaborate on many items including their charitable planning.  Because many wealth advisors are able to manage the assets in their clients’ donor-advised funds at some DAF sponsors (for example, there is no minimum to manage at the American Endowment Foundation, while there is a $250,000 minimum at some fund management companies, and varying minimums at the community foundations that allow this), CPAs and attorneys may wish to consult their clients’ wealth advisor or select a DAF that would allow advisor control.

Many charities need and count upon donations at the end of the year. While many would prefer that donations be provided directly to them, DAFs can be an efficient conduit through which charities can receive grants from their donors.  Because it is easy to establish a DAF, it would be ideal to do this earlier rather than waiting until the end of December so those clients who want to direct grants from their DAF this year may do so.

When a donor-advised fund (or any charitable vehicle) is created, it is important that clients have an understanding or direction of how they should proceed. They should discuss with their advisors and family what they want to do, who will be involved, whether they want to give during their lifetime and/or after death, where they want to give, how much they want to give, and even why they want to give.

Providing this framework for discussion will enable clients to develop a great sense of pride, accomplishment, confidence and satisfaction in knowing that their generosity is having a positive impact on the causes that are most important to them.

Ken Nopar is the principal of Nopar Consulting, a firm that trains professional advisory firms how to have charitable planning conversations with clients and how this discussion benefits the firms and clients. The firm also helps nonprofit organizations understand how to work with professional advisors.

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