Taxes, DAFs, and a Crowded MarketplaceSubmitted by American Endowment Foundation on November 4th, 2019
By Eric Kinaitis
According to the BLS, employment growth among financial advisors is expected to grow 7% from 2018 to 2028. So, in a crowded and competitive marketplace, who are the future winners likely to be?
A survey conducted among persons with a minimum of $150,000 of investable assets determined that those financial professionals with empathy, client-focus, and tax advice are the best situated to win profitable, loyal clients.
The survey indicated that 66% of investors regarded tax knowledge as the most important factor in choosing a financial advisor. Additional specialties that ranked high among investors when choosing a financial advisor included:
- Tax-optimized investing 58%
- Tax burden reduction 45%
- Estate tax planning 45%
Clearly, for a certain level of investors, taxes are a top-of-mind concern. That is why understanding the power of donor advised funds (DAFs) and the tax solutions that these charitable investment funds can offer to an investor is a key tool that advisors need to rely on today as well as in to the future.
DAFs can offer tax benefits in the five following ways:
1.) Income Tax: You receive an immediate income tax deduction in the year you contribute to your DAF. A DAF administrator is a public charity, so contributions immediately qualify for maximum income tax benefits. The IRS does mandate some limitations, depending upon your adjusted gross income (AGI):
- Deduction for cash – up to 60 % of AGI.
- Deduction for securities and other appreciated assets – up to 30 % of AGI.
- There is a five-year carry-forward for unused deductions.
2.) Capital Gains Tax: You will incur no capital gains tax on gifts of appreciated assets (i.e. securities, real estate, other illiquid assets.)
3.) Estate Tax: Your DAF will not be subject to estate taxes.
4.) Tax-Free Growth: Your investments in a DAF can appreciate tax-free.
5.) Alternative Minimum Tax (AMT): If you are subject to alternative minimum tax (AMT), your contribution will reduce your AMT impact.
Another key finding in the survey was the importance of empathy & client-focus. 56% of those surveyed would rely on a financial advisor to help them identify core beliefs and values about money. Understanding how important charitable causes are in the lives of these investors is an area ripe for discussion.
For many advisors, one of the hardest initial steps is how to ask clients about their charitable interests. Some advisors may feel that questions about personal giving could be regarded as an invasion of privacy. Explain to your clients that a conversation concerning their charitable interests will allow you to provide them the best professional financial advice possible. The questions to start with include:
- “Are you currently involved with any non-profit organizations? How . . . as a donor, volunteer, board member?”
- “Do you typically support the same charities every year or do you vary your support from year to year?”
- “How do you decide which charities you support?”
- “Who else helps you decide which charities to support?”
- “Do you give the same amount each year? Upon what does it depend?”
- “Which donations have you made that have provided the greatest satisfaction or regret?”
- “Would you prefer to give anonymously or receive recognition?”
- “What types of assets have you used when you have donated in the past? Cash, checks, appreciated stock, other non-cash assets?”
- “Do you have any charitable vehicles in place, such as a private foundation or donor advised fund?”
- “Do you want to donate during your lifetime, at death, or for many years after your death?”
By asking these questions, not only do you understand the importance of charitable giving in the lives of your clients, but you position yourself as an advisor interested in the holistic well-being of their clientele.
In an ever-competitive environment, setting yourself apart with the knowledge and empathy that current and future clients desire will separate financial practices that grow from those that don’t.
At American Endowment Foundation, we look forward to discussing how DAFs can be a multi-purpose tool in helping solve tax concerns and build a bridge to a deeper and more meaningful understanding of a client’s values and wishes. Contact us or call at 1-888-660-4508 to learn more.