How to know when donor-advised funds are best for clients

As all financial advisors know, every client possesses unique attributes, needs, and goals which collectively make up their personal and economic profiles. Along with those distinctive differences, comes the opportunity for you to help them leverage a variety of financial tools to optimize their specific situation, such as a donor-advised fund (DAF).

With DAFs being the fastest-growing charitable vehicle on the market today, it’s important that you are equipped to recognize your client’s individual circumstances and recommend the most effective strategy for them.

Here are five “what if” situations your clients may find themselves in where a DAF could be the perfect solution:

What if my client is wary of the current market conditions?

With the turbulent market state continuing to affect all areas of the economy, your clients may be hesitant to make an irrevocable charitable donation to a DAF. However, this is an excellent time to encourage your charitably inclined clients to open and participate in this unique giving vehicle. 

By donating either cash or non-cash assets to their DAF, your clients are eligible for an immediate tax deduction at the time of funding, with no timeline for when those gifts need to be distributed. “While deciding which community initiatives or nonprofit organizations to support, your charitable assets grow, tax-free.” This allows donors to continue to fund their DAFs, have their investments increase over time, and grant that money to causes they care about when the market conditions stabilize.

What if my client wants to give to multiple charities?

For clients who are already involved in philanthropic giving to a variety of organizations ranging from community foundations, churches, nonprofits, and more, the coordination of receipts and records can be cumbersome and often overwhelming.

Luckily, DAFs offer an opportunity for your clients to streamline their philanthropy and simplify records heading into tax season, “Rather than keeping track of gift receipts from multiple charities, a donor-advised fund serves as your single source of tax receipts and grant recipient information.” This allows donors to spend more time focusing on their charitable goals and strategy and less on the associated administrative tasks.

What if my client has a variety of assets, other than cash?

Over 90% of wealth is held in non-cash assets. When clients want to donate things other than cash to charities they care about, a DAF is a great option as it allows donors to give a variety of non-cash assets, including things like private equity, real estate, cryptocurrency, and more.

While working closely with your clients on their financial strategy, a variety of complex assets may come into play, according to Bank of America “It’s not unusual for successful individuals and families to have a significant portion of their wealth in appreciated assets that can be complicated to liquidate… What’s more, the sale could trigger a substantial tax bill.” In order to avoid a significant tax implication from selling things like private equity or restricted stock, you and your clients may consider using those assets to fund a DAF.

What if my client is interested in a long-term charitable giving strategy?

One of the most significant benefits of a DAF is the ability to establish a long-term philanthropic giving strategy with your clients and their loved ones. It’s important to find ways of incorporating future generations into your client’s financial strategy, and DAFs are designed to grow and nurture your clients’ donations over time.

DAFs also present the perfect opportunity to incorporate future generations into your client relationships, “[DAFs] are a wonderful opportunity for grandparents and parents to introduce their children to their trusted advisors so the family relationship can continue once they are no longer living.

What if my client would like to give anonymously?

One of the most unique and sought-after attributes of a DAF is the ability to give anonymously. If your client desires, their DAF can be set up so that only the organization receiving a grant can see the donor’s name on the gift.

While there are many different reasons why a donor would choose to remain anonymous with their gift, here are a few of the most common reasons:

1.       Avoid future donation solicitations from similar organizations.

2.      Keep a lower profile so they don’t display their wealth to fellow staff members and colleagues.

3.      Maintain their desired level of security.

If conversations with your clients lead you to believe that any one of these benefits may be of interest to them regarding their charitable giving, participating in a DAF could be the ideal solution.

Whether your client would like to give to a wide variety of charities, has access to resources other than cash, or would like to donate anonymously, participating in a DAF could offer the perfect solution for them. Encouraging them to participate in this giving vehicle also gives you the opportunity to weave future generations into your client’s financial strategy and goals, and subsequently incorporate them into your practice for years to come.

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.