Donor-advised funds: The key to helping clients reach long-term goals

Savvy advisors know that smart and strategic wealth management is a long game, and to provide truly holistic wealth management, advisors need to have a full understanding of their client’s financial life.

But there’s one important part of a client’s financial portfolio many financial advisors don’t consider: charitable giving.

A donor-advised fund (DAF) offers a simple way to address this challenge and strengthens client relationships.

Why DAFs are the fastest-growing giving vehicle

In 2021, Americans established more than 278,000 new DAFs, according to the 2022 DAF Report, further cementing the DAF’s position as one of the fastest-growing charitable-giving vehicles in the nation. This brought the number of DAFs to nearly 1.3 million and the value of all DAFs to $234 billion, for an average of more than $180,000 per DAF.

One factor fueling this growth is the simplicity of DAFs. To launch a DAF, a financial advisor and client choose a sponsoring charity to establish the fund on the donor’s behalf. The donor typically gets a current-year charitable-gift deduction for the initial contribution, and, in the case of donated long-term appreciated assets, they avoid capital gains taxes. Growth in the fund, and the gifted principal, is used to make grants to nonprofit organizations based on recommendations made by the client. Plus, even though the client no longer owns the assets contributed to the DAF, they can work with their advisor to guide how assets are invested and recommend how grants are distributed to nonprofits.

It’s not just simplicity that makes DAFs attractive though. There are five attributes that make them especially valuable as components of comprehensive wealth management:

  1. Long-game design
    As an irrevocable trust, a DAF is a long-term commitment. It functions as a charitable giving account that allows donors to make ongoing recommendations about how grants should be distributed.
  2. Immediate impact
    A DAF allows donors who have experienced windfalls, capital gains, and other wealth infusions to claim current-year charitable deductions, reduce capital gains taxes, and put donated funds to work quickly to benefit the causes they believe in. 
  3. Ongoing flexibility
    Once a DAF is funded, donors can take as much time as necessary to decide on grant recommendations, which means that a one-time windfall doesn’t have to result in a one-time charitable donation to gain tax benefits. Plus, a DAF can make grants as frequently or infrequently as desired.
  4. Built-in legacy
    Thepower that a donor has to contribute to a DAF and make recommendations about investments and grant distributions can be passed on to future generations, which allows donors to create a legacy of giving, encourage philanthropy among heirs, and engage their families in charitable giving.
  5. Ongoing economic insulation
    Because a DAF is an ongoing charitable giving vehicle, it can be funded when wealth is available and continue giving even in lean years. In that way, it insulates charitable giving efforts from economic ups and downs.

A win for the advisor and the firm

In a nation where six out of ten individuals, and 88% of affluent households give to charity each year, financial advisors who aren’t in some way involved in clients’ charitable giving aren’t fully involved in their clients’ wealth management.

Many financial advisors don’t see an opportunity to add value for the client through charitable giving. DAFs offer that opportunity, positioning the advisor as a connector and facilitator in the creation of the DAF. This not only can lead to a deeper and more holistic engagement in clients’ financial lives, but it also enhances the relationship between the advisor and their clients, as the assets in a DAF can remain under your firm’s management and you can continue to work with your client to direct how funds are invested.  Why wouldn’t a client want to entrust their trusted financial advisor with their charitable assets? 

Ren relieves this burden by providing access to a sponsoring charity (Renaissance Charitable Foundation) and providing the experts, tools, technology, and support needed to make DAF administration simple and straightforward. We also provide white-label resources that allow advisors and clients to fully engage with their DAFs, track performance and grantmaking, and generate tax documents and other records as needed.

With our full suite of charitable giving solutions, institutions that work with us can provide robust philanthropic services for clients who are interested in trusts, private foundations, or many other types of charitable vehicles. We also manage the disposition of non-cash assets as a means of making charitable gifts and claiming tax benefits for the client.

A multifaceted, long-term opportunity

In 2018, a U.S. Trust and The Philanthropic Initiative survey revealed that 91% of high-net-worth consumers believe it’s important to discuss philanthropy with their wealth managers. However, a 2018 US Trust survey found that only 45% of high-net-worth consumers are satisfied with the philanthropic discussions they have with their advisors.

Clients want to talk about philanthropy with their financial advisors, but they want their advisors to come to the table with solutions that meet their long-term goals. Considering its ongoing growth, a DAF may be the smartest solution for an increasing number of clients.

Is a donor-advised fund the right choice for your client?​

Get the answers to the most frequently asked questions about donor-advised funds in our free eBook — 12 Questions to Ask Before Setting Up a Donor-Advised Fund.