As donor-advised funds (DAF) have become more and more popular, the average age for clients to open them has continued to drop. Twenty years ago, most donors who established DAF accounts had already retired. Many donors today open and contribute to them when they are still working and their income is higher, as the value of the tax deduction may be greater than during retirement when their income is less.
However, many people still open DAF accounts after they have retired. Some have become more philanthropic once they stopped working, while others have learned that DAFs are easy to use, can accept donations of many types of assets, can be passed down to their heirs, and provide just one tax receipt which is easier to keep track of instead of numerous receipts when donating directly to multiple charities.
DAFs instead of foundations
Increasingly, many donors have closed private foundations and opened DAF accounts instead. This often happens because foundations become cumbersome and complicated to operate, the amount in the foundations has decreased, and the next generation is not interested in the administrative burden of a foundation and prefers the simplicity of a DAF. Other donors have opened DAF accounts to complement their family foundation.
With both current older clients and prospects, it is wise for advisors to determine which DAF sponsor is most appropriate. Many clients may have previously opened a DAF account on their own without their advisor. If the size of the account is insignificant and will never grow, it may be best to leave the account with the current DAF sponsor and the advisor probably does not need to get involved.
However, if the DAF account is of a size in which the client would benefit if their advisor were to manage the assets in the account, it probably is worthy of a discussion with the client. Often small accounts will become significant when illiquid assets are donated to the account, a client receives an inheritance, a DAF account is named the charitable beneficiary of a retirement account at death, or when a client in retirement becomes much more involved in philanthropic activities and donates more to the DAF in order to make more and bigger grants from it over time.
Considerations when establishing a DAF
For older clients who are looking to establish their first DAF account or to perhaps transfer their existing one, some of the aspects they should consider for various DAF sponsors include:
- Can the DAF account be passed down to heirs who would become the successor advisors?
- How long can the account continue after their death?
- What are the investment options for the DAF assets? How have they performed?
- Is the donor’s financial advisor able to select and manage the investments? At what amount is this possible?
- What are the fees of the current account they have versus other DAF options?
- What are the restrictions for grant recommendations? Will the DAF sponsor approve those to any IRS-approved charities or does it use, for example, a regional, religious, conservative or progressive filter?
- What types of assets can the DAF sponsor accept as donations besides cash and publicly traded stock? Will it accept real estate, business interests, privately-held stock or cryptocurrency?
- Can the donor determine how much to grant to various charities annually, or is there a minimum or maximum annual amount or percentage?
- Does the DAF sponsor require the donor to grant a specified percentage or amount back to the sponsor during the lifetime or at the end of the account?
- Can the DAF account be transferred to another DAF sponsor?
- How large is the DAF sponsor? How many DAF accounts and assets? Number of employees? Years in operation? Technology for making grants and accessing information online?
- Is it important for clients to be thanked by the charities to which they send grants? Will DAF sponsors provide donor addresses along with the grant checks to the grantees, or will they forward thank you letters from the charities to anonymous donors?
Because there are so many DAF sponsors today, it is important that older clients receive the proper guidance from their advisors about which DAF sponsor to select. It is comforting to many older clients that their advisors have their best interest in mind and can often help them switch to the most appropriate DAF sponsor if the initial one selected by the clients is no longer ideal. Utilizing the DAF sponsor that is best for the entire family can also help advisors work with the next generation when the initial clients are no longer living.
Ken Nopar is the vice president and senior philanthropic advisor for American Endowment Foundation (AEF), a leading independent donor-advised fund since 1993 with $6 billion in assets under oversight and 14,000 DAFs. AEF works closely with its donors’ wealth, legal and tax advisors in all 50 states. Nopar can be reached at firstname.lastname@example.org.