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How to Select The Most Appropriate Donor-Advised Fund

Eight factors to consider

Attorneys, as well as wealth and tax advisors, now routinely recommend donor advised funds (DAFs) as their preferred charitable giving vehicle.  According to the 2014 National Philanthropic Trust study, the number of DAFs increased by 43,000, from 174,000 to 217,000 from 2008 until 2013, while the number of private foundations (PFs) increased by only 8,000, from 75,000 to 83,000 in the same period.1

This trend will continue.  Donations to Fidelity Charitable grew by 22 percent to $4.4 billion last year, grants from Schwab Charitable increased by 25 percent to $928 million, the number of DAFs at the American Endowment Foundation (AEF) increased from 1,500 to 2,500 over the last two years and the Silicon Valley Community Foundation opened two DAF accounts valued at $970 million and $500 million in the last two years.

Comparison with PFs

PFs are certainly still appropriate for some clients, especially those who: (1) want to be in absolute control of every aspect of their philanthropy, (2) want to hire a family member to run it, (3) want to make grants to individuals or select scholarship recipients, or (4) want the perceived higher status of having a PF.

However, the trend is predominantly towards establishing DAFs, and many donors have closed their PFs and created DAFs due to the complexity and expense of operating the PFs and because they can, in most cases, accomplish their philanthropic goals with a DAF. Many advisors have increased the minimum threshold before they discuss PFs as an option.  At a recent panel discussion at the Chicago Estate Planning Council, an attorney and an accountant stated that they don’t begin to talk about PFs unless a client wants to fund it with at least $7.5 million or $10 million respectively.

Collaboration Between Attorney and Wealth Advisor

Once the decision has been made to create a DAF, it’s important for the advisor to determine which DAF sponsor would be most appropriate for each client (and for the advisor) because clients have different needs.  When possible, attorneys should confer with the clients’ wealth advisor to determine which DAF option may be most appropriate, especially because many clients want their wealth advisor to control the investments in their DAF account, and the advisor would also benefit from being able to manage these assets.  Philanthropy can be one way in which attorneys, CPAs and wealth advisors can begin to work together, which can lead to opportunities to refer business to each other.  Needless to say, many advisors wouldn’t be thrilled if an attorney or CPA recommends a DAF to a client in which the advisor can’t manage the assets.

Eight Factors to Consider

To select the most appropriate DAF, attorneys and wealth advisors need to understand their clients’ goals, as well as the opportunities and limitations of various DAF sponsors.

  1. Assets to be donated: Does the client want to donate publicly traded stock, privately-held C-corporation and S- corporation stock, real estate, life insurance or private equity?  Advisors should verify whether a DAF sponsor can accept these.  Advisors should know whether a sponsor would hold a donated asset if the client requests this or the sponsor requires its immediate sale. (Advisors also should determine if the client has any assets she no longer wants that can be donated or has any assets in which the cost basis is difficult to determine and may thus be ideal to be donated to a DAF.)
  2. Grants to be made: What causes or charities does the client intend to support?  Many national sponsors allow grants to nearly all Internal Revenue Code Section 501(c)3 organizations, but some local,  single-issue or religious sponsors may have restrictions.  For instance, clients who may want to exclusively fund specific overseas charities could consider Charities Aid Foundation America.
  3. Investment options: Increasingly, advisors are able to manage the assets in their clients’ DAFs.  What are the options, and at what amount?  Are the clients and advisors restricted to certain pooled funds, or can they determine the investments?  When allowed, minimums at which advisors can manage at community foundations typically range from $250,000 to $1 million. Schwab and Fidelity minimums are $250,000.  AEF allows advisors to manage DAF assets at any amount and on any platform.
  4. Time horizon and amount that can be granted: When establishing their DAF, are donors able to name successor donor advisors to continue their giving after their death?  If yes, can this continue forever, or are only one or two successor advisors allowed?  At that point, do the assets revert to the sponsoring organization, or can the advisor name other charitable beneficiaries?  Some donors may want to terminate their DAF at death, but others want their DAF to continue for generations.  Many donors want to determine how much to give each year, yet some endowed DAFs allow only a limited amount to be granted each year.
  5. Costs and other details: Charges can vary considerably from sponsor to sponsor, and typically they decrease significantly as the accounts increase in size.  Advisors should consider how much the initial donation will be, as well as anticipated additional donations.  Some clients make just several large donations out of their DAFs each year, while others prefer to make dozens or hundreds of small donations, so advisors need to know whether there are any grant size limitations.  Other considerations include deadlines for year-end contributions to DAFs, time needed to open and fund accounts and turnaround time for processing of grant requests.
  6. Process for making grants: Many sponsors allow donors to make grants online; however, some prefer to phone or send in requests.  Some sponsors have call centers, while others assign specific staff members to be contacts for individual donors.  Some sponsors allow grants to be scheduled in advance on a monthly, quarterly or yearly basis.
  7. Transferability: For various reasons, advisors need to determine if DAF accounts can be transferred from one sponsor to another. (for example, donor and advisor may want additional investment flexibility, donor wants to support charities that sponsor won’t approve, advisor switches firms and can no longer manage assets at initial sponsor).
  8. Resources: Most clients already know which causes and organizations they want to support, but some need guidance.  If so, some DAF sponsors may be better equipped to help donors than others.  For instance, most community foundations can help donors best understand local needs and can connect them with local charities.

Advisors Role

Advisors can play a critical role in helping clients achieve their charitable goals, whether simply by funding a DAF earlier in the year and before the busy end of December or by helping clients receive the significant tax benefits of establishing and funding a DAF in advance of a liquidity event.  Advisors can determine which DAF, whether from an internal offering from their firm or from an outside sponsor, will best meet their clients’ (and their own) objectives.

Though advisors also benefit substantially when they have the charitable conversation with clients, they also help their clients experience the greatest level of satisfaction and pride that stems from their generous support of their favorite causes and charities.



TAGS: Philanthropy
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