Since the Tax Cuts and Jobs Act passed at the end of 2017, more CPAs, as well as attorneys and financial advisors, have recommended their clients establish donor-advised funds.
Though numerous DAF accounts were opened in the past 10 years, many clients opened DAF accounts at the end of 2017 and throughout 2018. As a result, there are now over 450,000 DAF accounts compared to 150,000 a decade ago, according to the National Philanthropic Trust.
Many advisors at a Heckerling Institute conference in January indicated they expect that another wave of DAFs will be established this spring when clients will be surprised when they see their tax returns and realize the importance of bunching their charitable contributions. While some may create small DAFs to get over the $24,000 standard deduction, many others who will earn large incomes are approaching retirement, or can donate significantly appreciated assets, will create and fund large DAF accounts that will enable them to make grants for the next five, 10, 50 or more years.
Because there are more DAF sponsors than ever before, it is important for tax, financial and legal advisors to determine which may be a good fit for clients since some DAFs will be ideal for certain clients but not for all. If their advisors simply tell them to go open a DAF account, clients may select a DAF sponsor that has significant limitations and may leave them disappointed, upset and frustrated. CPAs and attorneys should first consult with their clients’ financial advisors before recommending a DAF because the advisors can frequently open these DAF accounts and manage the assets, which is beneficial for both the clients and advisors.
Here are some of the items that advisors and their clients should consider, as well as questions they should ask in advance:
- Will the DAF sponsor approve the grants that their clients recommend? Are there any geographic or issue limitations? Will a DAF sponsor only approve grants in their local area or that pertain to the mission of the DAF sponsor?
- What are the investment options for the assets in the donor’s DAF account? Advisors and clients should understand whether there are pools of funds, the recent performance of these, and if there are restrictions pertaining to investing in individual securities or other investments.
- Can the donor’s financial advisor manage the assets in the DAF account? When this is possible, the minimums to manage the assets often vary from $250,000 at the largest commercial DAFs to $1 million for other DAFs. Other, more independent DAFs allow advisor management at any amount and do not offer funds themselves.
- What is the service model? How often does the DAF sponsor send out grants? Does it have a robust online offering to open accounts, make grants, check past gifts and grants, and communicate with donors? Do high net worth donors work with specific individuals at the DAF sponsor at all levels, or is that personal level of service reserved just for the largest accounts?
- What are the fees? How long does it take to establish an account or send out grants? What is the minimum size to create an account? When are the year-end deadlines?
- What types of assets can the DAF sponsor accept? Are they only cash and appreciated securities, or complex assets like real estate, privately held C or S corporation stock, and LP or LLC interests? What are the minimums for these types of donations?
- What is the lifespan of accounts? Can the DAF account continue in perpetuity, or is it limited to the life of the donor or one successor advisor? In the end, does the donor decide where the remaining assets are distributed, or are they granted to the DAF sponsor?
- Can the donor determine how much to grant to various charities? Some DAF sponsors only allow a certain percentage of endowed DAF funds to be granted out each year, while other DAF sponsors require 50 percent of the funds to be granted to the DAF sponsor itself as is often the case at university or other single-issue DAF sponsors.
- What resources are available to help donors and their advisors? Does the DAF sponsor provide content, services or resources when donors or advisors need advice with charitable giving? Do these complement or potentially conflict with the work of the advisors?
- What is the reputation of the DAF sponsor? Has the number of DAF accounts and assets at the DAF sponsor grown significantly in recent years as the popularity of DAFs has increased? Does the DAF sponsor offer DAFs through advisors or work directly with donors and not with their advisors?
Since there are more DAF sponsors these days than ever before, advisors need to closely evaluate which is the best fit. The sole option advisors may have recommended previously may no longer be the best one. Since clients are more aware of DAFs than before, they may have heard about a particular one, but it is critical that advisors get involved before clients make a decision on their own. Many of these clients would want to know about a few DAF options since they may only have heard of one.
Should clients have already set up a DAF on their own or followed another advisor’s previous suggestion, and they are not satisfied for any of the above reasons, most DAFs are transferable to another DAF sponsor. Though this may be an option, selecting the ideal DAF initially is a better alternative for everyone involved.
