By Gavin Morrissey, Guest Columnist
When planning to establish a donor advised fund (DAF) for a client, the conversation tends to focus upon the impact of that initial gift that funds the account. This certainly makes sense given the time and effort involved in educating the client regarding how the DAF works, identifying the best asset(s) to fund the account, coordinating those efforts with the client’s accountant and attorney, and the operational efforts to bring those pieces together. With the DAF established and funded with an impactful gift, the client can now begin the rewarding process of making grant recommendations to the nonprofit organizations they care to support.
While the initial gift to a client’s fund may tend to be the largest, we should not ignore the opportunity to continue to incorporate the DAF into the client’s ongoing charitable plan.
Many clients view their annual charitable gifts as part of their pre-and post-retirement cash flow plans and the donor advised fund can enhance those efforts to ensure that their philanthropic goals continue to be achieved.
If your client(s) have established DAFs in the past, now may be a wonderful time to evaluate whether an additional gift to their DAF might prove to be a beneficial step towards enhancing their means to continue their ongoing grant making efforts.
The stock market has continued to push to record highs and the embedded long-term capital gains found in clients’ nonqualified accounts are a great resource for funding charitable gifts. As we continue to work our way towards a post-pandemic world, the missions of nonprofit organizations continue to serve as an area where clients can put their resources to use in furthering the causes of what matter most to them.
Not only can the DAF serve to meet a client’s philanthropic goals, many clients are also using their donor advised funds to explore socially responsible investing. One of the common hurdles to clients transitioning their investment philosophy to a socially responsible approach is the resulting income tax liability when realizing capital gains upon reallocating the portfolio. The DAF, however, can provide a tax-exempt platform where advisors can implement a socially responsible investment approach that aligns with a client’s goals without the concerns of income tax.
The clients with an existing DAF understand the inner workings of their fund and have experienced the benefits of the continued use of that fund. It is time to evaluate whether those clients are open to additional contributions to their DAFs.
As part of a comprehensive financial plan, ongoing contributions to a DAF can be a very powerful component in achieving various goals. For a pre-retiree, ongoing contributions to a donor advised fund can serve as “front-loading” of their charitable dollars as it pertains to their retirement cash flow needs. The current bull market has presented an opportunity to use appreciated stock as a funding mechanism for many clients.
Additional contributions of appreciated stock prior to retirement allows the client to receive an income tax deduction today when it is most valuable to them in their highest income earning years. The capital gain embedded in the stock will not be taxed when sold in the DAF because of the tax-exempt status of the fund. An income tax deduction, avoidance of capital gains, the ability to pare larger positions, and the “front-loading” of their charitable gifts into their retirement years result in a great outcome for clients!
Financial planning outcomes can be further enhanced when pairing ongoing contributions with the sale of investment property, the exercise of employer stock options, or partial Roth conversions just to name a few. Every clients’ needs and goals are unique, however, those with an existing DAF understand the benefits of their fund and will likely embrace the opportunity to enhance their plan when presented with opportunities that achieve financial and charitable goals in unison.
Gavin Morrissey is a managing partner of Financial Strategy Associates, Inc., located in Needham, Massachusetts. Gavin has earned an undergraduate degree in economics and finance, a juris doctorate, and a Masters of Law in taxation. He applies the disciplines learned through his education to provide tax-efficient holistic solutions that are customized to each clients’ needs. He is a member of the AEF Council of Advisors.
At American Endowment Foundation, we look forward to discussing how DAFs can play a role in building your AUM and aiding the charitable wishes of your clients. Contact us or call at 1-888-660-4508 to learn more.