Which Clients Should Open Donor Advised Funds

By Ken Nopar

Though the number of individuals and families who have established donor advised fund (DAF) accounts already exceeds 450,000, many more continue to open them. Financial advisors, estate planning attorneys, and accountants have encouraged clients to open DAFs since they are easy to establish and use, able to accept donations of simple and complex assets, inexpensive, and tax-efficient.

Numerous clients can still benefit from creating and funding a DAF. Because more advisors now discuss DAFs with clients and because more fund sponsors offer them directly to donors and thus bypass financial advisors, it is beneficial for advisors to proactively engage their current clients and prospects to determine whether establishing a DAF is appropriate. 

These conversations deepen relationships with clients, enable advisors to manage charitable assets that are important to the clients, and allow the clients to have a greater impact on the causes and charities most important to them. And even if clients established a DAF account directly with a sponsor, it is to their advantage to transfer the donor advised fund to another DAF sponsor that will allow their advisor to manage the assets. Last year, more than $50 million transferred from other DAF sponsors to AEF.

The types of clients who continue to be most interested in establishing donor advised funds include:

1. Clients who are approaching retirement. It is advantageous to make large donations while earning high income so they can receive greater tax benefits now. They can subsequently continue to make grants while income is less in the future.
2. Clients who have a pending liquidity event (i.e. sale of business/real estate/other asset or will inherit wealth).
3. Clients who have already retired or sold business and now has time, assets, and interest to get involved with philanthropy.
4. Clients who want to or should sell highly appreciated securities or have assets with unknown basis. Often advisors utilize these to create or fund DAFs when onboarding new clients or when looking to rebalance investments.
5. Due to tax law changes, many clients are now bunching their donations in one year and making grants from their DAF over time.
6. Women, who are generally more charitably inclined and generous, now are earning more, living longer than men, and are controlling more money, especially after being widowed or divorced.
7. Couples or individuals without children who will have to decide what to do with their wealth.
8. Clients who want to involve children or grandchildren in charitable planning or instill charitable values in them.
9. Clients who want philanthropy to continue to unite family after their deaths or to create charitable legacy.
10. Clients with financially independent children or who do not want to leave their children too much.
11. Clients who want to support their preferred causes and charities instead of leaving money to children they may not trust or who have different ideas or values.
12. Clients who have been impacted by an emotional trigger (illness, natural or man-made disaster, refugee or immigration crisis, visit to impoverished area, etc.)
13. Younger clients who want to establish a baseline for giving that will grow over time or who wish to involve their young children.
14. Younger clients who seek a simple, efficient, tech-savvy way to make charitable donations.
15. Millennials or entrepreneurs who want to give back and who will continue to earn high income.
16. Clients who have been frustrated with cumbersome or complex foundations or other charitable vehicles that were established previously.
17. Clients who seek privacy and may wish to donate anonymously.
18. Clients who may not love philanthropy but hate government and taxes even more.
19. Clients who frequently ask their advisor to donate stock to many different charities (Easier for advisor to just donate to one DAF sponsor).
20. Clients who have difficulty keeping or finding all of the gift receipt letters from different charities they support.

Because nearly all HNW clients still have highly appreciated assets and make charitable donations every year, many advisors feel that this is another ideal year for clients to create a DAF or to make additional donations to their DAF accounts.  Last year, many donors waited until the end of the year, and because markets dropped significantly, they donated less than they would have had they established or funded their DAF account earlier.  Those who contributed earlier were glad that they listened to the advice of their advisors and did not delay.

Clients who may be concerned that their income or markets will drop in the future, may be advised to create and contribute to a DAF now so they will be able to continue to make grants in the future.

Since year-end volume is anticipated to increase again, it is important that advisors start the conversation soon so that clients have time to move forward this year. Even if clients do not open accounts immediately, this conversation will help avoid the common situation where donors ask their advisors to donate securities to many different charities in the last week of December. Clients, advisors, and non-profit organizations all benefit when the initial charitable planning conversation takes place before the fourth quarter.

Call us at 1-888-660-4508 or contact us to help you determine how a donor advised fund at AEF can be of service to you and your clients.