Clients strive to maintain their levels of charitable giving even when the financial markets turn negative. They typically support their favorite causes and charities because they feel a deep connection to them, and they know that these organizations’ fundraising efforts become more challenging when other donors don’t feel as financially secure and may cut back on the amounts they give.
Donor-advised funds (DAFs) allow clients to set aside assets to support charities. It’s always easier for a donor to make a donation once she’s already allocated assets for charitable giving purposes rather than having to write a check, donate by credit card or even give appreciated stock. During the recent recession, non-profit organizations would have been in worse shape if donors with charitable vehicles didn’t continue to give generously during this time. In market downturns or increased volatility, clients are often receptive to advisors’ ideas or options about ways in which they can maintain their generous support.
DAFs have become, by far, the most popular charitable vehicle, with over 217,000 in 2013 (up from 175,000 in 2008), according to the 2014 NPT report. That number continues to increase for many reasons, including the growing awareness that some DAFs now allow wealth advisors to manage the assets at various levels, with Fidelity Charitable’s minimum at $250,000 and the American Endowment Foundation at any amount.
When to Create DAF Accounts
Often, donors and their advisors create DAF accounts during high-income earning years or when they have simple or complex assets that have appreciated in value and they wish to avoid paying capital gains taxes. Because DAFs are non-profit organizations themselves, donors receive the same generous tax benefits as if they donated directly to individual charities, and these benefits are often more substantial than if they were to donate to their private foundations (PFs).
Although some donors use their DAF accounts to make grants to charities during the years immediately after their account is created or after additional contributions to their account, many set up these funds so they can make grants over a number of years or occasionally in perpetuity. Because they’re simple to create and make grants to, some refer to DAFs as “charitable checking accounts,” though the earnings on the increase in value when invested can be substantial and grows tax-free.
Advisors can use DAFs as a way to bring in additional assets under management, as they can identify some of their clients’ other assets that can be contributed to their DAF accounts. These include real estate, farmland, insurance, grain, privately-held stock and interests in limited partnerships and limited liability companies. Often, advisors recommend that their clients donate an asset with a low cost basis or one that’s difficult to determine, as they can receive a tax deduction for the fair market value for these donations.
During periods of challenging markets, clients who have a DAF or other charitable vehicle can take comfort in knowing that they’ll still be able to provide consistent support for the charities that mean so much to them and the people and causes that the charities strive to help. This sentiment is especially true for those whose income rises and falls each year, as they know that their favorite organizations depend on their yearly donations. Though a charity may understand that a donor suffered a drop in income or asset levels, this understanding doesn’t make it any easier for a donor to explain the reason for the elimination of or a reduced annual contribution.
A DAF is an ideal solution for many clients and their advisors, though it’s not the solution for every client. Many clients still prefer to directly support charities, and PFs or other planned gifts may be the most appropriate vehicle for some. Often, a combination of different options is ideal.
By proactively discussing charitable planning with clients, advisors can often deepen their relationships and help their clients immensely. These conversations also demonstrate to clients that their advisors are truly interested in them and their long-term goals.
Because over 95 percent of high-net-worth clients are active donors, it’s critical for advisors to have the charitable conversation with them throughout the year, just before the peak charitable giving season in the fall and even during or shortly after difficult market periods. Some may wish to create a DAF immediately if they’re concerned about future asset levels or market direction, while others may feel more comfortable in creating DAFs during more positive markets.
Advisors play an important role in helping their clients determine which giving options are best for them. DAFs have increasingly become the go-to charitable vehicle for both advisors and clients during both stable and unstable markets, as the clients strive to provide continued support to the charities that are most important to them. In the end, the clients, advisors, and non-profit organizations all benefit from these charitable planning conversations.