Tax Time Tips: Advisors Should Remind Accountants That They Can Establish DAF Accounts for ClientsSubmitted by American Endowment Foundation on February 27th, 2023
By Ken Nopar, VP-Senior Philanthropic Advisor
Clients are now meeting with their accountants to review the past year and look ahead. Charitable giving has become much more prevalent in these annual conversations as a result of recent tax law changes. Additionally, in the past year, some HNW clients altered their usual giving or gave more in response to the COVID pandemic.
In recent years, more accountants have been encouraging their clients to bunch their charitable contributions, establish donor advised funds (DAF), and donate appreciated assets instead of cash. Some have suggested that their clients open DAFs to complement their private foundations, or to simply close their foundations and open DAF accounts due to the small size, complexity, responsibility and expense (not to mention that many accountants don’t enjoy preparing the foundation tax returns).
However, many accountants who recommend that their clients open DAF accounts do not indicate where they should open them, so their clients sometimes have to find a DAF sponsor on their own. Others may suggest the most prominent local or national names, and these may not be the most appropriate DAF sponsor for the clients. No one sponsor is ideal for every client.
Because it is to the clients’ advantage for their financial advisors to be involved in selecting the DAF sponsor so they can select and manage the assets in the DAF account, advisors should reach out to their clients’ accountants before they make a recommendation. Many accountants may not be aware that the advisors already have relationships with the DAF sponsors and can manage their mutual clients’ DAF assets.
If the advisors and accountants do not communicate, their mutual clients run the risk of setting up a DAF account at a sponsor that is not ideal: These risks include:
- The DAF sponsor’s investment options are limited or inadequate.
- The clients’ financial advisor may not be able to manage the assets in the DAF account or can only do so at a high minimum.
- Some DAF sponsors can only accept donations of limited types of assets.
- The DAF account cannot be passed down to future generations.
- The DAF sponsor may not approve the clients’ grants to different charities, while many single-issue DAF sponsors may require 50% or more of the grant amounts to be directed back to the DAF sponsor itself.
- There may be restrictions about how much can be granted from the fund each year, especially if it is an endowed DAF.
- Some DAF sponsors will not survive for various reasons: Lack of interest or few funds that are opened, not financially sustainable, or diverts resources away from sponsor's primary activities.
- Fees may be high.
- Technology and processes may be substandard, so grants take longer to send out, online granting may not be efficient, or past grants or donations are not easily viewed.
- The DAF sponsor’s service team does not provide individual service to its donors unless a donor’s account is very large.
When clients use their DAFs as smaller annual pass-through accounts that will never grow, then it usually does not matter which DAF sponsor is selected and the advisor does not need to be involved. However, if the clients increase the amount in the DAF over time, include heirs in the grant making process, want the account to continue after their deaths, or the amount is substantial, then it is to everyone’s benefit that the advisor is involved in the selection and process.
Fortunately, most DAF accounts are transferrable to another DAF sponsor, so if the wrong sponsor is initially selected, the account can be transferred to another sponsor. Though this process is usually fairly straightforward, this unnecessary step can be avoided if the advisor is included in the first place so the right DAF is selected initially.
Because DAF accounts are easy to open and some DAF sponsors market directly to clients, it is always best for advisors to stay one step ahead so clients and their accountants know to turn to them before they decide to open an account. In the end, clients, advisors, and the charities that the clients support all benefit. The accountants also win because they only need to request one tax receipt from the client from the DAF sponsor, instead of hoping that the clients remember to turn in every tax-receipt letter from every charity they supported over the past year.
At American Endowment Foundation, we look forward to helping donors and advisors determine the best strategies for their charitable giving. Please contact us or call at 1-888-966-8170 with any questions.