Many recent studies and articles have indicated that fewer people are getting married or having children. Pew Research Center surveys have shown that 44% of nonparents between the ages of 18 and 49 are “not too or not at all likely” they will have children, while 38% of adults between ages 25 and 54 are “unpartnered” (not married or living together).
Advisors are already aware that an increasing number of their clients and prospects aren’t married or don’t have children. Additionally, some clients who have children don’t plan to leave them anything at their deaths or any more than they already have given to them. As a result, the discussion about what clients should do with their assets is just as important for these groups as it is for those who will pass down as much as they can to their children.
For purposes of this column, however, I’ll mainly concentrate on childless clients regardless of their marital or cohabitation status. Knowing that they’re unlikely to spend every dollar before their last breath, they need to turn to their advisors for guidance. Because nearly all wealthy clients are philanthropic to some degree, many of them want to dedicate at least a portion of their assets to support causes and charities that are important to them.
As a result, many of these clients develop a charitable plan to support these charities during lifetime and at death. Some will give directly to non-profit organizations, while others will establish a donor-advised fund (DAF), charitable remainder or lead trust or private foundation. Numerous DAF accounts have been opened in the past decade, resulting in over 1.2 million DAFs with only 90,000 foundations now.
Traditionally, married couples established DAF accounts and named their children as the successor advisors to the accounts. While this is still the most common situation, recently there have been an increasing number of DAF accounts established by individuals or couples without children who want to send grants to charities on their deaths, establish disposition plans so the grants can continue for a number of years or name siblings, other heirs or friends as successor advisors. Most of these are established and funded during lifetime, with some additional funding at death, though some are created now but funded later.
Advantages of DAFs
Childless donors open DAF accounts often on the recommendations of their advisors and because of the numerous advantages that all types of DAF donors receive:
- It’s easy to establish DAF accounts and send grants through the DAF sponsor’s online granting portal;
- Most DAF sponsors can accept donations of a variety of liquid and illiquid assets;
- Donors receive maximum tax benefits by contributing to a DAF;
- DAF sponsors don’t charge any fees to establish accounts, and annual fees are typically low;
- Donors receive tax benefits at the time of contribution and then make grants over time without a required annual minimum distribution, though a high percentage of DAF donors make annual grants;
- Donors receive and need to keep only one tax receipt for donation to DAF instead of numerous receipts to keep should they give directly to many charities;
- DAF assets grow tax-free;
- Some DAF sponsors allow donors’ advisors to invest DAF assets;
- Many donors create and fund DAFs as they approach retirement and make grants during retirement when income is less; and
- Donors can easily change succession or disposition plan after DAF is created, and there isn’t a fee to make changes.
Additional Advantages for Childless Donors
Childless donors create DAFs for additional reasons. Some donors may be concerned about granting a significant amount at their deaths to a specific charity or two at one time and may instead want their DAF sponsor to distribute that amount in a disposition plan over time. Others have no such concerns and set up their DAF accounts so the remainder is granted at death.
Anonymity is appealing to some childless donors, especially those who are concerned about privacy or security. Giving through a DAF is practically the only way in which donors can remain anonymous if desired, though less than 5% of DAF grants are indeed anonymous. One recent DAF donor shared that she gives anonymously because she doesn’t want to be solicited for additional donations. She also said that she leads a modest lifestyle and doesn’t want her friends to know how wealthy she is but won’t care if they find out once she’s no longer alive.
Increasingly, as DAF donors understand how their IRA distributions to beneficiaries will be taxed, some are naming their DAF as the charitable beneficiary of the IRA and leaving other assets to their heirs. This often provides more for both the heirs and charities.
Charitably-minded business owners who don’t have children will occasionally will establish a corporate DAF so their business can engage employees and fund charities in their community. Recently a DAF donor without children converted his personal DAF into a corporate DAF so his company could continue to give after his passing.
Successor Advisors
While many entrust nieces, nephews, friends or other family members to become successor advisors on a DAF account, others may not and fear that they’ll give to different types of charities or causes. The old expression that donors “can’t control giving from the grave” may hold true unless they establish a disposition plan.
Donors who name others as successor advisors should engage them in conversations about the DAF during their lifetime so the DAF isn’t a surprise or perceived as a burden. The successor advisors can often participate in the grantmaking decisions with the donor so there’s continuity when the donor is no longer living. While some create legacy DAFs to be funded at death, most establish and fund them during lifetime and perhaps additionally at death.
Get a Plan in Place
Whether DAF donors without children want their DAF to continue or terminate at their deaths, they need to have a plan in place to fulfill their philanthropic mission. Often, as people age, they wonder how they will be remembered and what their charitable legacy will be. Proper charitable planning with their advisors can provide peace of mind and a sense of fulfillment and accomplishment. Advisors can plan a critical role in helping clients achieve those feelings because they can initiate these conversations and turn thoughts into action.
Ken Nopar is the vice president and senior philanthropic advisor for the American Endowment Foundation (AEF) donor-advised fund.