Tuesday, April 13, 2021

Eight Reasons Why Older Clients Like Donor-Advised Funds

They’re simple to use and make it easy for advisors and clients to start charitable conversations early.

The number of donor-advised funds (DAFs) has continued to grow exponentially. There are currently about 450,000 DAFs for individuals and families, which is three times the number as ten years ago. There are about 400,000 additional employee giving accounts classified as DAFs in the recent National Philanthropic Trust (NPT) report, but these are very small and are not managed by advisors.

Because there was so much need in the past year, many donors who had previously established DAFs increased their grants to charities since this pool of charitable assets was readily available. Others whose businesses or investments fared well created DAF accounts or contributed additional amounts to them. Because the assets in the DAF accounts can only be donated to other charities, these donors are thus in a perfect position to recommend grants to their favorite charities on a regular basis or when there are future crises.

Though some donors established DAFs on their own, many advisors have been responsible for the growth of DAFs since they have introduced the concept of giving through DAFs to their clients over the past decade. While the advisors are able to manage the assets in the DAF accounts at many DAF sponsors, most advisors recommended DAFs to clients primarily because of the many benefits to the clients and the charities they support.

Although many clients still open DAFs during retirement, the average age has been steadily dropping as many clients have been opening DAFs while in their 50s and 60s and still working. Regardless of when clients create their DAF accounts, they enjoy making grants in the years soon after the account is established as well as in the decades afterwards. Many want their heirs to become the successor advisors on these accounts, which enables advisors to continue the relationships with these family members.

There are numerous reasons why older clients are so pleased that they established their DAF accounts and continue to do so. Some of these include:

1. They are very simple to use. They receive one tax receipt for any contributions to their DAF and do not need to keep numerous receipts like they did previously when they donated stock or other assets to various charities. They can go online to the DAF sponsor’s website and make grants, and can check the portal to see which grants they’ve previously made.

2. Clients can donate assets when they are still working and their income is still high, so they can most likely receive a more significant tax deduction than if they were to donate a similar amount during retirement. Then during retirement, when their income is lower, they have plenty of assets already set aside in the DAF account specifically for granting purposes so they do not need to dip into their other investments.

3. Their advisors can manage and grow the DAF assets with various DAF sponsors, though the minimum amount may be $1,000,000 at some community foundations or other sponsors; $250,000 at some commercial DAF sponsors; and no minimum at several DAF sponsors. Pure customization of the DAF portfolio may only be available with certain sponsors. DAF investments grow tax-free at all DAF sponsors.

4. Clients can donate large amounts from a liquidity event like an inheritance or sale of an asset to donor-advised fund sponsors, and then can recommend grants over time. Many donors do not want to give a large amount at one time to only one charity and lose control should the mission or leadership of a charity change, or the charity encounters other difficulties.

5. Clients can donate more complex assets that have greatly appreciated to DAF sponsors that regularly accept these. Business owners regularly donate a portion of their C Corp and S Corp stock before they sell their businesses, while others donate life insurance, limited-partnership interests, real estate, cryptocurrencies, and other assets that normal charities cannot accept.

6. Many older donors want to create a DAF account so they can set an example for their children and others. Very often, DAF donors will involve their children in giving decisions, and often will make grants on behalf of their children. Then when the DAF is passed down to these heirs, they will be able to continue the family’s giving traditions with funding already in place.

7. Increasingly, DAF donors are naming their DAF accounts as the charitable beneficiary of their retirement accounts at their deaths so the full amounts will be distributed to the DAF account; otherwise, significant taxes will reduce the amount in many of these retirement accounts distributed to heirs.

8. Many donors who previously established private foundations are converting these to DAFs because they are tired of the expense, complexity, compliance and governance, and because of significant tax advantages of donating to DAFs instead of foundations. Even though some clients ask about creating foundations, most tax, legal and wealth advisors recommend that clients don’t begin to consider foundations unless the amount exceeds $10 million, $20 million or $50 million. Even then, DAFs are often preferable unless the clients demand total control and are willing to deal with the complexities involved.

Though these charitable assets may not comprise the bulk of clients’ estates, they are often among the most important to them. Clients welcome having the charitable conversation because their advisors can help them give more efficiently, and with greater impact, than the clients could have done on their own.

As clients get much older, some advisors perceive that they may be concerned about how much they will have left, should donate, or can pass down to future generations. Having this charitable conversation early can help clients plan appropriately so they can achieve all of their personal, charitable and legacy goals.

Ken Nopar is the vice president and senior philanthropic advisor for the American Endowment Foundation, a leading independent donor-advised fund since 1993 with over $4.5 billion in assets under oversight and over 10,000 donors. AEF works closely with its donors’ wealth, legal and tax advisors in all 50 states. Nopar can be reached at kennopar@aefonline.org.

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