Why Some Advisors Establish Donor Advised Funds Now and Fund LaterSubmitted by American Endowment Foundation on April 25th, 2022
By Ken Nopar, VP-Senior Philanthropic Advisor
As the number of donor advised fund (DAF) accounts has increased to 1 million, many clients and their advisors know that if they have not already opened one, they soon will. Though most clients make their initial donations when they open their DAF accounts, some fund the accounts several months later or even after their death.
Some who open the account but temporarily hold off on the initial donation may be waiting to receive a bonus or other compensation, sell or donate an illiquid asset, or wait until the optimal time to donate a stock or fund.
Since it can take time to open an account, it often makes sense to create the DAF account in advance and then be ready to quickly fund it at the appropriate time. These are known as placeholder funds. Should the advisor or donor wait for the ideal moment to open the account, the perfect time to donate the asset may have passed and the donor will have less to donate and therefore less to give away.
There is typically no charge to establish these placeholder funds, so if the advisor and the client agree that a DAF is a good idea but they are not sure when, how much, or even which asset to donate, they can complete the DAF application and open the account. These placeholder funds should be used only when clients are serious about opening a DAF account and anticipate that the funding will take place within several months.
Time can be of the essence when donating certain assets and opening accounts, so it is wise for advisors to open the accounts in advance, especially if they will use a DAF sponsor that needs to first approve that the advisor or firm can manage the DAF assets. If there are any delays in opening an account and donating the asset, clients will not be pleased if they learn that the account could have been opened earlier.
In addition, opening DAF accounts takes longer in the fourth-quarter peak giving season, so it is very important that advisors take the necessary steps in advance. Donating cash or publicly traded stock can be fairly quick at most times of the year, while donating privately held stock, real estate, cryptocurrency or other illiquid assets can take much longer.
And since timelines are usually longer in November and December, it is wise to start early so that advisors can avoid having to tell a client that it was too late for them to receive the tax deduction for the year.
For these reasons, nearly 20% of all DAF accounts established at the American Endowment Foundation last year were placeholder funds. If clients indicate that they may open a DAF account in a year or two, a placeholder fund is not appropriate, But if the funding will take place in the next several weeks or months, this can be a wonderful solution and save much time and frustration later.
The other type of DAF that is established in advance is the legacy DAF, though these are usually set up years in advance of the initial donation and are used as part of an estate planning strategy. While usually clients create and contribute to DAFs in their lifetime so they can engage their heirs in grantmaking, sometimes this is not possible and the legacy DAF is created in lifetime and often funded later or at death.
Many clients today open a legacy DAF and then name the fund as the charitable beneficiary of their IRA or other retirement accounts. This allows their heirs to make grants of the full amount in the retirement account without significant taxes being paid had the heirs first been the beneficiaries. Others supplement their DAFs that they’ve used in their lifetime with further funding after death. Many parents feel that charitable giving can help keep the family united after they die.
Some clients want to avoid naming specific charities as the charitable beneficiaries of their estate plans since they may be concerned that the designated charity may change its mission or leadership. By naming a DAF instead, they and their successor advisors have more flexibility in selecting the ultimate grantees. Some DAF sponsors allow financial advisors to continue to manage these DAF assets after their client’s death, which enables them to continue to work with the families on these and other accounts.
By opening these legacy DAF accounts, advisors are able to specify the DAF sponsor and account name and number in any estate planning, charitable trust or retirement account documents.
Though the vast majority of advisors and clients make their initial donations at the time they establish the DAF accounts, having these legacy and placeholder DAFs as options allows advisors to best help their charitably minded clients decide on the ideal timing of the donations when opening the accounts. Most donors continue to make donations over time to their DAF account after it is initially opened and funded, but often the largest donations are the initial ones.
The number of donor-advised funds will continue to grow as clients and their advisors see how these accounts help the clients have a greater impact on the issues that are of most importance to them. The last few years have demonstrated that DAF donors have not only increased their donations to their DAF accounts, but they have also significantly increased their grants from these accounts to charities in need of support.
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.