Like any solid relationship, the one formed between a financial advisor and a client is built on mutual trust and understanding. According to recent studies, talking about deeper, more personal subjects, such as giving, is key to building trust. You already talk about plans for retirement, funding college educations and completing bucket lists. Discussing charitable giving goals is a natural next step.
Start the discussion by asking your client some simple questions:
- What charities do you currently support and how do you support them?
- What was your most important or most satisfying charitable donation or volunteer experience?
- Do you want your family to have more involvement in your giving?
These questions can lead to larger discussions about how to maximize and simplify giving. Outright gifts to charities or gifts through a private foundation or supporting organization are some options you may consider. Private foundations often make sense for families who want to manage high levels of giving across multiple generations with the help of their own dedicated staff and board of directors. Supporting organizations are another vehicle allowed under the Internal Revenue Code for donors who have a close connection to a public charity. But for many clients who don't want to engage with such complex options, a simple donor-advised fund (DAF) can make a world of difference.
Why set up a donor-advised fund?
While the benefits can vary among DAF sponsors, which include community foundations and financial services firms, almost all DAFs can benefit your clients in the following ways:
- Maximum tax advantages. Because DAFs are administered by public charities, gifts to DAFs are tax-deductible to the maximum extent allowed by law. The chart below shows some notable differences in tax-related benefits between private foundations and DAFs.
AGI Tax Deduction Limitation – Cash
AGI Tax Deduction Limitation – Long-Term Capital Gain Property (Publicly Traded Stock, Closely Held Stock and Real Estate)
Gifts of Real Estate or Closely Held Stock
Cost Basis Deduction
Fair Market Value Deduction
- Separate the timing of deductible gifts and grants. Clients can make tax-deductible gifts to DAFs when it makes the most sense financially for them. They can then carefully decide where and when to grant their charitable dollars, supporting the 501(c)(3) public charities they care about most on their own timelines.
- Give more than cash. Clients can convert non-publicly traded assets like business interests, personal property and real estate into charitable dollars.
- Decrease taxable income. Clients who might be getting ready to sell a business, stock or any other appreciated asset can avoid capital gains and receive a tax deduction by donating the asset to a DAF.
- Simplify paperwork. A DAF streamlines the administrative side of giving. It is easy to set up and manage. Clients will only need to keep charitable tax receipts for donations to the DAF, sparing them the burden of collecting receipts from individual organizations.
- Leave a legacy. Through a DAF, clients may have the ability to leave a legacy of generosity by naming their children or grandchildren to advise their fund after their lifetime, inspiring future generations to become philanthropists.
How are donor-advised funds invested?
Assets in DAFs are invested and grow tax-free. Generally, DAF sponsors offer investment options based on risk tolerance, but some sponsors allow donors to use their own investment advisors to manage assets in their DAFs. Before setting up a fund, find out if the sponsor will allow you to continue to manage your clients’ full portfolios.
How will my client make grants?
- 24/7 online access. Most sponsors offer online fund management, so clients can suggest grants from their funds, check their balances and download past statements at any time.
- Worry-free giving. DAF sponsors perform the due diligence necessary to ensure grants are made to IRS-qualified public charities, and they can mail checks directly to charities on behalf of your clients.
Take the next step with your clients and engage them on a deeper level by starting a conversation about giving today.
Debbie Wilkerson is President and CEO of the Greater Kansas City Community Foundation, a leading provider of charitable giving services.