Using Donor Advised Funds vs. Donating Directly to CharitiesSubmitted by American Endowment Foundation on August 15th, 2022
By Ken Nopar, VP-Senior Philanthropic Advisor
With 1 million donor advised fund (DAF) accounts in the country, an increasing number of clients ask their advisors whether they should open a DAF account or continue to donate directly to charities.
Though advisors still need to educate many of their clients about the advantages of DAFs, some clients are already knowledgeable. Some clients still ask whether they should create private foundations, but because DAFs have become much more popular, many more are inquiring about DAFs.
With the decline in the markets, inflation and other economic challenges, charitably minded clients need giving advice now since they still want to provide badly needed support to their favorite charities and causes.
Many of these nonprofit organizations are very concerned that they will fall short of their fundraising goals this year because of the above concerns, and the overall number of donors continues to decline. Fortunately, those with considerable wealth remain determined to maintain or even increase their giving.
Those who established and funded DAF accounts or other charitable giving vehicles previously are in a very good position to continue to be generous since they have already allocated assets for giving, and they do not have to tap into their investments or savings to give. Giving from DAFs and other vehicles helped keep some charities afloat during the height of the COVID pandemic and other crises.
Donors who have not done sufficient charitable planning may turn to their advisors to determine how and which assets they should donate, or even if they do not inquire, they would welcome the input from their advisors.
DAFs are not appropriate for all clients, and many should continue to make donations directly to their favorite charities. If this is the case, advisors can still recommend that their clients donate the most tax-advantaged assets since some clients have continued to write checks or use credit cards when other assets should have been donated instead. Some donors who have DAF accounts also give directly and not through their DAFs for various reasons.
Donating directly instead of using DAFs may be most appropriate in some of the following situations:
- Clients only support a few charities.
- Clients are not now nor will they become philanthropic.
- Clients are comfortable knowing that large donations to particular charities are irrevocable even if the mission or leadership of the charity changes, the clients’ charitable mission changes, or the clients move and don’t want to support the local organization.
- Charities are able to accept illiquid assets, including stock or more complex assets.
- Clients’ entire charitable giving is done each year through their qualified charitable distributions from their IRA.
- Clients are not interested in a long-term giving plan.
- Clients do not want to set aside assets for future giving and are not concerned about tax planning.
- Clients fear that they may not have enough for themselves or their heirs.
- Clients are not concerned that the amount they provide to charities may fluctuate significantly from year to year.
- Clients make numerous small donations and are not concerned about receiving tax deductions.
Though there will always be far more donors who give directly to charities instead of creating and using DAFs to send grants to charities, wealthy donors are increasingly utilizing DAFs. The latest Giving USA report showed that 15% of all giving first went to DAFs. Some reasons for this include:
- Advisors strongly encourage their clients to open DAF accounts.
- DAF sponsors can often accept illiquid assets such as privately held stock, real estate, limited partnership interests and even appreciated stock that many charities cannot.
- Donors do not want to contribute a large asset or donation at one time to one charity, so by donating first to a DAF, they can make grants over time to one or more charities.
- Donors want to donate to a DAF and receive a large tax deduction while they are working and their income is high, and then continue to make grants in retirement when their income is less.
- Business owners or executives donate to a DAF in successful years and can then continue to give consistent amounts to charities from the DAF even when their business does not do as well.
- Assets invested within DAFs grow tax-free.
- DAFs enable clients to quickly react and provide support during crises. This was critical during the initial onset of COVID when many charities were in danger of closing.
- Donors can easily and quickly make grant recommendations and check their past granting activity online at any time.
- Donors enjoy the simplicity and efficiency of just receiving one tax receipt letter from one DAF sponsor instead of numerous letters from many grantees.
- Donors enjoy having a DAF so they can more easily include their children in their grantmaking and can easily pass down the charitable vehicle, values and assets to them.
- Donors want some structure to help in their personal or company giving but do not want the burden of a foundation.
- Donors are more easily able to decline solicitations by stating that the cause is not aligned with the mission of their DAF.
Regardless of whether a client decides to establish a DAF account, the charitable conversation between clients and advisors is beneficial to both parties as well as the charities that are most important to the clients.
Though there are still many reasons why clients should donate directly to their favorite charities, they and their advisors can determine if it is more prudent to utilize a DAF or other charitable vehicle to make grants, receive the maximum tax deduction, and have the greatest impact upon the organizations that they care deeply about.
A version of this article originally appeared in ThinkAdvisor, July 27, 2022.
At American Endowment Foundation, we look forward to discussing how DAFs can play a role in better charitable giving. Contact us or call at 1-888-660-4508 to learn more.