By Ken Nopar
Every November and December, advisors and clients rush to open donor advised funds (DAFs) before year-end. The pressure upon the advisors and their associates, the clients, and the staff at AEF to rush to submit everything on time and process the applications and donate assets before year-end is enormous and often unnecessary. This is exacerbated when clients also want to make grants from their new accounts before December 31.
Placeholder funds at AEF, also known as shell funds within some firms, have become a very popular tool for advisors who do not enjoy the year-end crush. They simply are a way, without charge, for advisors and their clients to submit the completed donor advised fund application to AEF ahead of time, and then when the clients decide (hopefully sooner than later!) to donate assets to their fund, the account is ready to go without delay.
After recent tax law changes, and with “bunching” donations becoming commonplace, placeholder funds are more frequently used. Nearly 20% of AEF DAF accounts begin as placeholder funds. Clients and their advisors have also been setting up placeholder funds when they are waiting for the optimal day or target price to donate a particular asset, since any delay in their sending in the application may result in a smaller contribution and deduction.
These proved to be very helpful in the last few months of 2018 when the markets dropped significantly. Those who had previously created but not yet funded placeholder funds were able to very quickly donate assets without having to first wait to submit the application and fill out the paperwork. With increased market volatility lately and uncertain direction of the markets, these placeholder funds could again be advantageous to donors and their advisors.
Using a placeholder fund is an easy way to remove one of the biggest obstacles from opening a DAF; client delay. It is easier for everyone when the opening and funding takes place at the same time; but when a client agrees that opening a DAF is the right decision and just needs a bit more time to determine the amount, the ideal moment, or which assets to donate, a placeholder fund is the perfect solution..
If clients indicate that they may open a DAF account in a year or two, a placeholder fund is probably not appropriate, but if the funding will take place in the next several weeks or months, then this can save much time and frustration later. Since there is no charge to open them, and the online application process is easy for both advisors and clients, this proves to be another win-win for everyone involved. Please note that the placeholder fund is not to be confused with the AEF Legacy Fund which is to be funded at the death of the donor.
Many clients may want to open accounts and make grants to their favorite charities at the end of the year; unfortunately, this is often not possible because the process takes longer then. If they open and fund the accounts earlier in the year, whether they use the placeholder fund or not, the clients will be happier and the charities that need funding throughout the year will be grateful as well.
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.