Donor Advised Funds: A Value-Added Tool for Financial Advisors

Donor Advised Funds: A Value-Added Tool for Financial Advisors

Article posted in Donor Advised Fund on 15 November 2001| comments
audience: National Publication | last updated: 18 May 2011
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Summary

In this edition of Gift Planner's Digest, Philip T. Tobin discusses donor advised funds and explains how this simple, flexible and cost-effective tool can assist in tax-efficient planning and allow a wide range of Americans to participate in philanthropic pursuits.

by Philip T. Tobin

Philip T. Tobin is President of American Endowment Foundation (AEF), a public charity that administers a national, independent donor advised fund program. Phil is a member of the National Association of Family Wealth Counselors (NAFWC) and the National Association of Philanthropic Planners (NAPP). He was formerly chief financial and administrative officer of The Cleveland Foundation and a founding trustee of The Investment Fund for Foundations (TIFF). He provides educational seminars to financial advisors on donor advised funds. Contact information: Website www.aefonline.org; email:philtobin@aefonline.org; Phone (330) 656-1629

Note: Originally published on November 15, 2001, this article was revised by the author and republished on the Planned Giving Design Center on November 30, 2001.


Introduction

It's the afternoon of December 23. This is ordinarily the busiest time of the year for financial advisors, but this year seems to be worse. You are feeling the pressure of resolving an extra-heavy load of client tax-planning issues before year-end. If everything goes right you should be able to make it.

Murphy's Law: the phone rings. An important client calls to say that he is about to receive a large and unexpected year-end bonus, and as a result, plans to exercise some stock options. You make a quick mental estimate of what this will do with his income taxes and the picture is not pretty. To offset the additional taxes, you suggest that he make a charitable gift by year-end. He likes the idea and mentions funding a special seminar program at his alma mater. He asks you for his charitable giving options. He is an important client. You want to be responsive.

A quick review of alternatives indicates that the traditional solutions will not work. In the past, the client has supported the university's annual giving appeal out of his checkbook. But this is going to be a sizeable gift, so it makes sense that the funds come from appreciated securities. Furthermore, you sense that he is not going to give these funds to the university carte blanche. He will want some assurances that his seminar concept is carried out properly. Because of this issue of control, a foundation of some sorts makes sense. Establishing a private foundation or a supporting organization, however, will not work. It would take six months or longer to get IRS approval. And besides, these options can be expensive to set-up and a hassle to operate.

You look again at the calendar, knowing that neither the IRS nor the client will give you slack on that year-end date. Happy New Year!

This frustrating end-of-year scenario leads to sleepless nights for many financial advisors. Keep your cool. You do have an alternative: Donor Advised Funds.

Scope

Donor Advised Funds (DAFs as they are called) are becoming the most popular tool of family philanthropy in America today. Although DAFs are not new, they are not widely known by most people. Because they are a simple, flexible and cost-effective way for Americans of even average wealth to practice family philanthropy, more professional advisors are recommending them in the plans they design for their clients. The timing for DAFs is right, given the forthcoming wealth transfer projected over the next 55 years.

What are DAFs? How do they work? How can they be established? Why are they so popular? How do they integrate with other planning strategies? Can financial advisors participate? The answers to these questions form the basis for this discussion.

Donor Advised Funds: A Popular New Tool for Financial Planning

Not a significant player in the field of charitable planning just ten years ago, donor advised funds are now one of the fastest growing tools of family philanthropy in America. According to a May 2001 report in the Chronicle of Philanthropy, assets at many of the nation's largest donor advised funds grew to over $10 billion last year. DAFs made $1.4 billion in grants to charitable organizations in 2000.1 The Chronicle's 2000 survey, its second examination of DAFs, shows significant year-to-year growth as follows:

Chart 1 Growth in Donor Advised Funds -- 2000 vs. 1999

The Chronicle of Philanthropy's Survey of DAFs - May 31, 2001
2000 vs. 1999
Value of Assets Up 29 %
Grants Awarded Up 39%
Number of Donors Setting Up Funds Up 33%


The 2000 figures show continued growth in DAFs since first reported five years ago. Assets in DAFs have quadrupled since 1995. Just as 401k plans and qualified IRAs have made investing in the stock market a household activity for average Americans, DAFs are lowering the barrier to entry for family philanthropy. You no longer have to be a Rockefeller or a Gates to be a philanthropist.

DAF's Popularity and the Concept of Social Capital

Underlying the popularity of DAFs as a strategy of family philanthropy is the fundamental concept of social capital. This concept is remarkably simple, but runs so counter to conventional thinking about wealth that it is only now being fully explained, explored and developed as a financial planning tool. It looks at wealth in a different perspective. An individual's estate (income plus net worth) consists of two parts:

  • The first part is family capital. This is the wealth an individual can spend between now and the time he or she dies and what can be given to heirs. Family capital is the wealth that families keep.

  • The second part is social capital. This is the wealth that can't be kept, spent before death or given to heirs. The government has mandated that a significant portion of every individual's wealth must be used to support the general welfare of the country. Typically individuals give up their social capital in the form of taxes, and let it go at that. But when they do, they also give up control of that wealth. A glance at the federal budget tells us instantly that we have very little understanding of where our tax dollars go, and virtually no control at all over how they are used.

Is there an alternative--a way individuals can distribute their social capital without giving up control of its use? The answer is "yes"--by establishing a family foundation. But until now, the traditional tools that enable individuals to set up and administer family foundations were available to only the very wealthy, or were too inflexible or too much of a hassle to use.

Traditional Family Foundation Tools

The Private Foundation is appropriate for individuals with substantial wealth who prefer to establish and endow their own foundation with no ties to any particular charitable organization. A private foundation is typically established by a single donor who wants to retain maximum control over grant making and create a legacy of family philanthropy that can continue over successive generations.

For many individuals, the private foundation option is not practical because:

  • set-up expenses can be substantial.

  • tax advantages are not as good as those available from gifts to public charities.

  • lack of confidentiality -- everything a private foundation does is public record.

  • tax regulations such as, minimum pay-out requirements, excise taxes and complicated tax reporting can be a hassle.

The Supporting Organization is appropriate for individuals who want the independence and "feel" of a private foundation but also want the tax advantages of a public charity. The supporting organization enjoys tax-advantaged status as a "public" charity because of its stated intention to support of one or more public charities.

However, for many individuals, the supporting organization option is also not practical because:

  • set-up expense can be substantial (similar to that of a private foundation)

  • tax regulations pertaining to supporting organizations are some of the most complex and arcane sections in the Internal Revenue Code

  • family members cannot exercise majority control over the supporting organization's board of trustees

Now, thanks to DAFs, individuals of even average means have a simple, flexible and cost effective way to capture, manage and distribute most, if not all, of their social capital to charitable organizations of their choice. In so doing, they turn what would have been tax dollars used at the government's discretion into charitable dollars used by organizations whose missions and values reflect their own. Individuals give up their social capital but retain "virtual control" over its use. Now, Americans have a choice about where our social capital goes, and how it is used. And because DAFs operate under the umbrella of a host public charity that provides all the administrative and reporting services, families can concentrate on the enjoyable and emotional side of family philanthropy.2

The Golden Age of Philanthropy

The timing is right for DAFs. America stands on the brink of an enormous philanthropic opportunity, larger than any before in the history of the world. This opportunity springs from a number of factors, most importantly the impending forecast of a huge transfer of assets from one generation to the next.

In their 1999 report, Millionaires and the Millennium, sponsored by the Social Welfare Research Institute, John Havens and Paul Schervish predicted, with conservative assumptions, that the transfer of wealth to the next generation over 20 to 55 years will be as follows:

Chart 2 Estimated Transfer of Wealth To the Next Generation

Time Horizon
Transfer of Wealth (Trillions)
Bequests To Charity
20 Years 1998 - 2017 $ 12.0 $ 1.7
55 Years 1998 -- 2052 41.0 6.0


The report goes on to identify underlying trends that support the prospect of an unprecedented opportunity for philanthropy:

  • economic resources available for charitable giving are already large and growing faster than previously appreciated

  • both the reality and perception of financial security are more widespread than ever before

  • economic and emotional incentives to devote economic resources to charitable purposes increasingly shape the moral sentiments of wealth holders

  • new values-based approach to financial planning is increasing the commitment of wealth holders to charitable giving by guiding them through a planning methodology in which they discover for themselves:
    • their economic potential for charitable giving
    • the people and causes that are important to them
    • the combination of financial, family, and philanthropic strategies best suited to implement their objectives

But this golden opportunity poses key questions to financial advisors:

1. Where will this money go:

  • to their heirs?
  • to the government (by default)?
  • to charity?

2. Who will guide this wealth transfer process?

3. Who will manage these dollars?

As individuals come to realize that their social capital decisions can have not one, but two possible outcomes, they see that one of these, charitable giving opens the door to the exciting new world of family philanthropy. Many financial advisors now view DAFs as the key to that door.

What Is a DAF?

A donor advised fund is a component fund that is managed under the tax umbrella of a public charity such as a community foundation. The donor makes an irrevocable gift to the host charity. Because the host charity is recognized by the IRS as a 501(c)(3) tax-exempt organization, the donor gets a fair market value tax deduction in the year of the gift. Assets are deposited into an investment account where they can grow tax-free. The donor retains the right to advise the host charity in administering the affairs of the DAF. Depending on the policies of the host charity, this advice may include naming the fund, managing investments, recommending grants and selecting a replacement advisor at the death of the donor. Under no circumstances can DAF funds benefit the donor or any other private interest. The donor's role is that of an advisor (hence the name "donor advised fund"). The donor cannot direct that specific action be taken. The concept of advice is key to DAF's superior tax treatment by the IRS.

Who Sponsors DAF Programs?

DAFs are not new. Community foundations created them over 30 years ago. DAFs are available from the following sources:

Community Foundations

A community foundation is a public charitable foundation that receives contributions from a broad base of sources, mostly individuals, and manages them as a family of funds under community oversight for the benefit of its charitable purposes. In addition to traditional fund types (designated, restricted and unrestricted funds) community foundations offer attractive DAF programs that feature simplicity, flexibility, and professional management and offer an array of grant-making support services.

Financial Services Affiliated Gift Funds

Financial service companies such as Fidelity Investments, Vanguard Group and Charles Schwab & Company are among those that sponsor "commercial" donor advised fund programs. They do this by establishing a "captive" public charitable foundation to act as the "host charity" for its donor advised fund program. The host charity out sources investment management services to its parent financial service company. Commercial programs typically accept only cash or marketable securities, and allow donors to select investment options only from a limited menu of mutual fund pools.

Independent Charitable Gift Funds

Public charitable organizations like American Endowment Foundation (AEF) of Hudson, Ohio, and Christian Community Foundation (CCF) of Woodland Park, Colorado, sponsor donor advised fund programs. These foundations are "independent" in that they are not affiliated with financial institutions. They do not manage money nor do they provide financial planning services; rather, they look to the donor for advice on investment matters and to the donor's financial advisor for investment services. In accordance with IRS regulations pertaining to public charities, recommendations from donors are advisory.

How Does a DAF Work?

Although not all programs are alike, here is how a DAF typically works:

  • Donors can create a DAF with a minimum contribution of $10,000.

  • Set-up is simple and it can be done quickly.

  • All DAF programs accept cash and marketable securities. Some programs are more flexible in accepting other types of assets.

  • Donors can contribute to their DAF and use it for regular charitable giving during their lifetime and /or arrange for it to receive a testamentary gift such as a bequest, as the remainder interest of a charitable remainder trust or as beneficiary of an IRA or qualified retirement program. Additional contributions are generally allowed at any time. Other individuals also can contribute to the donor's DAF and obtain a tax deduction.

  • Donors retain the right to advise the host charity on investment matters.

  • Once contributions are accepted, donors can recommend which charitable organization will receive grants, when grants will be distributed and in what amounts. Minimum grants sizes typically range from $250 to $500.

  • The host charity reviews all grant recommendations. Once a charitable grant recommendation passes muster, the host charity arranges with the financial advisor for invested assets to be liquidated as needed and issues a check to the grantee charity in the name of the donor's DAF.

  • Anonymous grants can be arranged if the donor so chooses.

  • The host charity does everything else, thus freeing the donor and the donor's family to concentrate on the emotional and enjoyable side of philanthropy.

Advantages

Because or their flexibility, DAFs allow the donors to tailor their family foundation to their special needs. Not all DAF programs are alike; some are more flexible than others. The following stories illustrate how others benefit from their DAFs:

Simple Set-Up

To set-up her DAF, Mary Ulster completed the host charity's simple, three-page application. The host charity made the arrangements with her financial advisor to establish an investment account for the benefit of Mary's DAF. The account was established in a matter of hours and the electronic transfer of funds from Mary's investment account to her DAF account was accomplished shortly thereafter. The mechanics of opening, funding and utilizing the DAF are straightforward and similar to establishing a retail investment account. Mary did not have to learn about new products or services. And she did not have to incur any legal or accounting expense for the set-up.

Tax Advantages

Bob Carpenter wanted to establish a family foundation and contribute half of the closely held shares in his family's business to the foundation. Also, he preferred to have these shares held by his family foundation for an indefinite period. Instead of creating a foundation, he chose a DAF program that was willing to accept and hold the stock. Because of the host charity's public charity status, Bob could take an immediate income tax deduction on the fair market value of the shares contributed. Had he elected to establish a private foundation, his tax deduction would have been limited to his cost basis on the shares contributed. Also, because of annual limits on deductions as a percentage of adjusted gross income, Bob is taking his income tax deduction quicker than if he had selected the private foundation alternative. On Bob's recommendation, the stock was subsequently sold by the DAF with no capital gains tax liability. Assets in his DAF are not subject to estate taxes. Since invested assets of the fund continue to appreciate tax-free, more funds will be available to support his favorite charities.

Grantmaking on a Personal Timetable

Ray and Martha Hildebrand have reduced their year-end pressures by separating the typical two-step decision-making process of obtaining a tax deduction and selecting charities to support into its individual parts. They now can take tax deductions when they make contributions to their DAF without having to decide at that time what charities they want to support. They say that the DAF helps reduce the typical year-end stress.

An Alternative to a Private Foundation or a Supporting Organization

Steve Kraft sees his DAF as more simple and cost effective to establish and operate than a private foundation or a supporting organization. His host charity provides record keeping, tax reporting and fiduciary accountability. This allows Steve and his wife to concentrate on working with their children to make their community a better place in which to live.

A Legacy of Family Philanthropy

John and Lucile Lund want their Lund Family Fund to become a vehicle of family philanthropy over successive generations. From time to time, other family members and friends contribute to the Lund Family Fund and obtain tax deduction in doing so. The Lunds like the fact that the host charity customizes letterhead bearing the name of the Lund Family Fund for use in distributing grant checks to the charities. The Lunds specified their three children as successor advisors after they are gone so the fund can go on with family involvement over successive generations. They believe that the DAF will eventually enhance their children's position in the community as other community members become aware of their role in the Lund Family Fund and invite the children to participate in charitable and civic activities.

A Parenting Tool

Jim and Laura Martin want to distribute five percent of their DAF's value each year to charities. Of that amount they allocate $1000 so that each of their children, age 8, 11 and 13, can participate in recommending grants. The children research causes that interest them and then meet with the parents to present their recommendations. The Martins then decide as a family which charities their DAF will support. In this way Jim and Laura are using their DAF as a parenting tool to assure that the children will be prepared to undertake responsibility for the family fund as successor advisors after they are gone. Their experience in the DAF will benefit them as eventual stewards of their family's wealth.

A DAF Integrates Well With Other Planning Strategies

Recently, the Khrone family decided to establish a DAF as a companion to their existing charitable remainder trust. This arrangement gives them the following benefits:

  • The DAF allows the Khrones to organize and simplify regular charitable giving which previously had been made out of their checkbook. The host charity becomes their charitable record-keeper.

  • The Khrones intend eventually to contribute certain life insurance policies to the DAF. These policies were originally set in place to ensure the loss of a parent during the college-funding years. When the children graduate, these policies will no longer be needed.

  • Because of substantial tax liability on IRA distributions at the time of death, the Khrones specified their DAF as co beneficiary of their IRA programs. Distributions to the DAF at death are not subject to tax.

  • The Khrones have the option of making distributions to their DAF, from time to time, from income of their charitable remainder trust, thus giving them more control over their year-end tax planning activities. When the Khrones die, the charitable remainder trust will be liquidated and the remainder proceeds will be transferred into the Khrone Family Fund. In this way the children can stay involved in the family fund. In addition, the financial advisor can, subject to the policies and oversight of the sponsoring charity, continue to manage investments for the DAF.

Memorial to a Loved One

Len and Fran Winters established a DAF scholarship program in memory of their son, Steve, who died in an auto accident while in college. Fraternity members, alumni and others contribute regularly to this memorial fund. Based on eligibility criteria specified by the Winters, the college advertises the scholarship's availability, screens candidates and selects the award winner. On recommendation of the Winters, their DAF funds the scholarship grant to the University for distribution to the student in memory of Steve Winters.

Anonymity

Joan Brennan and her husband, Ben, own a family hardware store in a small midwestern farming community. Joan recently received a $1.3 million inheritance from her mother. They saw this as an opportunity to benefit their community in significant ways, but they were concerned about being overwhelmed with charitable solicitations from fellow townspeople. Their first grant recommendation was for $30,000 to benefit a small church school in their community. Because the grant was made anonymously, the transmittal letter of the host charity instructed the school to acknowledge the grant back to the host charity. With the acknowledgement came thank-you notes handwritten in crayon by each of the 34 children, including their daughter. The Brennans prefer that their daughter will never know that her parents are the anonymous benefactors. The DAF will allow that to happen.

Control

Don Barrett was head of the music department of Jennings High School. Teaching music to children was his life's passion. When he retired, he established a charitable remainder trust and named the school as charitable beneficiary. He and his wife receive income from the trust as long as they live. He had originally intended that, when he and his wife were gone, the school would receive the remainder interest for use in the school's music program. When the school board announced plans to close down the music program within two years, Don modified the trust and designated his DAF as remainderman. With this arrangement, Don stays in control over those dollars while living. When he dies the trust will be terminated and the remainder dollars will be transferred to the DAF. His son, as successor advisor, will ensure that the school board continues the music program. If they discontinue it, the son will recommend an appropriate charitable substitute.

Grants Flexibility

Tom Greene selected a DAF program that offers maximum flexibility in grant making. He is interested in supporting religious youth programs around the country. His DAF program allows that flexibility.

Key Things to Remember About DAFs

In evaluating whether a DAF is suitable as a charitable giving vehicle, consider the following factors regardless of who sponsors the program:

  • Contributions, once received and accepted by the host charity, become the property of the host charity and cannot be returned to the donor.

  • All recommendations from the donor are advisory. The board of trustees of the host charity is free to accept or reject, in whole or in part, all recommendations. Furthermore, the DAF must be operated exclusively for charitable purposes.

  • The host charity will typically consider grants to qualified tax-exempt public charities or to qualified governmental organizations; but it will typically reject grant recommendations deemed to be a problem with IRS regulations such as grant recommendations:
    • to individuals and to private foundations;

    • that satisfy a pre-existing pledge for any private benefit, such as tuition sent to individuals;

    • for dues or membership fees, benefit tickets, the donor's time or services, or goods bought at charitable auction; or

    • for political contributions or to support campaign activities.

Not All DAF Programs Are Alike

Although many features are common to all DAF programs, professional advisors say they often look for special features in the programs they recommend for their clients.3

Here are examples of desirable special features:

Asset Flexibility

While all programs accept cash and marketable securities, some programs are more flexible and allow a variety of assets. Here are some examples of flexible feature in some programs:

Closely held Securities. Owen Davis was seeking an opportunity to sell his business and retire. He wanted to spend more time with his wife and grandchildren and pursue long-deferred hobbies-perhaps even establish a museum to house his world-class collection of antique woodworking tools. But he was concerned that the heavy tax burden on the sale of his business would erode his resources and compromise his plans. On the recommendation of his financial advisor, Owen established a DAF and contributed 10% of the stock in his business to the DAF before the sales agreement was finalized. When the business was later sold, Owen's DAF received the proceeds from selling its shares to the new buyer. Owen's financial advisor, who continues to manage Owen's other assets, also has the opportunity, subject to the operating policies of the sponsoring charity, to manage investments made with these proceeds in the DAF, as well.

Real Estate. George and Kathy Simpson established a DAF with the contribution of a second home that was no longer needed. They received a tax deduction for the property's appraised market value. On the advice of the Simpsons, the host charity listed the property with a local real estate agent who sold the property in six weeks. Proceeds of the sale were deposited into the DAF. Life Insurance. A.C. Thornton established a DAF and funded it with life insurance policies. To make this work, the insurance contracts were amended to name the host charity as owner and beneficiary. A .C. makes tax-deductible contributions to his DAF each year at anniversary time. The host charity uses these funds to cover premium payments on the policies when due. A.C. originally intended that, on his death, insurance proceeds would be used to fund scholarships at his college alma mater. A.C. recommended that the host charity borrow against the cash value built up in these policies to fund the scholarship program. He wanted to enjoy the experience of making scholarship awards while he was living rather than waiting for the program to start after he was gone. The University administers the programs in consideration of A.C.'s recommendations and informs A.C. of amounts to be granted. A.C. recommends that his DAF grant the funds required to make these awards.

Limited Partnerships and LLCs. John and Julie Hudson formed a limited partnership and funded it with appreciated, non-marketable securities. They then contributed 99% of the limited partnership shares to their DAF. They selected a host charity that would hold these limited interests over the long-term and will not pressure the partnership to liquidate its holdings prematurely.

Investment Options

Many DAF programs typically allow donors to select investment options from a limited menu of investment pools. Much like a mutual fund, the donor's fund is unitized and thus participates in investment expense, gains or losses in direct proportion to units held. Once the investment program is established, the donor has little or no ability to change investment allocation. The donor's financial advisor often is not a participant in the investment process.

Independent programs do not manage investments, nor do they provide financial planning services. Instead, they rely on the advice of the donor and the donor's financial advisor for the investment management. Independent programs do not normally pool donor contributions. Instead, they allow the donor to recommend investment decisions for familiar products and services in separate portfolios much like those of a self-directed IRA account. The donor's financial advisor continues to play a vital and ongoing role in the management of DAF investments and earns income from doing so. Consistent with the requirements of a public charity, all investment recommendations are advisory. Such arrangements do not excuse the sponsoring charity from its fiduciary duty to evaluate the experience, suitability and track record of the advisor, monitor the performance of the advisor, and otherwise exercise the same care and prudence it would apply in connection with the management of its non-DAF assets.

Example: Charles Howland moved his DAF from a financial services affiliated gift fund to an independent program. He was not happy having his DAF invested in the growth pool offered by the previous provider. He wanted to structure a portfolio consisting primarily of value-oriented equities and convertibles in an investment strategy much like that of his personal investment account. His financial advisor now manages both portfolios subject to the oversight of the independent sponsor.

Donor Involvement

Some DAF programs are more flexible than others in allowing the donor to stay involved. Here is an example of creative donor involvement:

Grants. Bob Toland wanted to support his church. The church needed a way to underwrite expenses on the old sanctuary while a new sanctuary was being built. At Bob's recommendation, the host charity structured a "program related investment" or recoverable grant. Under this arrangement, Bob's DAF would make a loan to the church instead of an outright grant. The loan would be repaid when the old church building is sold and the funds no longer needed. Because of the church's charity status, the host charity fashioned a favorable interest rate arrangement including the deferral of interest payment until the note is paid off. When the old building is eventually sold, the sales proceeds will be used to liquidate the loan and repay outstanding interest. Bob will then have the funds in his DAF to make grants to other needy charities.

DAFs -- An Opportunity for Professional Advisors

As the intergenerational wealth transfer begins to unfold in the new millennium, the opportunity to expand the capacity of family philanthropy has never been greater. The professional advisor is in a unique position to play a pivotal role in ensuring that his or her clients seize this opportunity. The attorney working on a client's will, the financial advisor developing investment strategies for a client portfolio, the valuation consultant helping a client sell the family business, the accountant developing year-end tax strategies, the business advisor helping a family think through the succession process, all of these professionals have reason to raise the subject of family philanthropy with their clients.

The problem is that many professional advisors do not feel comfortable in "asking the philanthropic question," that is, discussing their client's interests in family philanthropy during the course of the wealth planning process.

According to a recent study on the advisor's role in philanthropy prepared by The Philanthropic Initiative, Inc. (TPI), what donors need and want in the way of education and information about family philanthropy, and what many financial advisors can and are willing to provide, are in many cases are at odds with each other.4 TPI summarizes the differences in attitude of the two groups surveyed as noted below:

The Advisor's Attitude. Over half of those advisers interviewed-many of whom are highly experienced practitioners-do not discuss their clients' charitable or social values, or help them develop a philanthropic mission. There is still a perception that values-based discussions about philanthropy are highly personal and therefore uncomfortable. A substantial majority of these advisors would like to become more knowledgeable about how to make charitable giving conversations with clients more effective. That said, many would continue to refer their clients with complex philanthropy objectives to third-party philanthropy professionals.

A majority of advisors want more resources to help counsel clients about their philanthropic options. There is a perception that there is adequate access to technical tools, but that methods and materials for addressing broader-based philanthropy planning are in short supply and not easily found. Nearly two-thirds of the advisors interviewed employ a very limited number of charitable planning tools, consistently relying on one or two planning vehicles, regardless of the client's circumstances or charitable intent.

The Donor's Attitude. In overwhelming numbers, these donors report that it is they and not their advisors who typically raise the subject of philanthropy. These donors want their advisors to be more knowledgeable about philanthropic planning, and take a more comprehensive approach to their giving, rather than focusing heavily on tax planning and specific giving goals.

Most of the donors surveyed believe their advisors are technically competent, but they also believe most advisor lack the tools and/or comfort levels to link technical counsel to more personal, values-based philanthropy planning. These donors want to be guided in their philanthropy to achieve important personal and social objectives. They want help in creating comprehensive and cohesive giving programs, and to acquire the tools necessary to become effective donors. If their advisors are not knowledgeable about philanthropic planning, donors seek referral to others who are knowledgeable in these matters.

The TPI study confirms that advisors are interested in acquiring a more complete understanding of charitable giving, as well as the tools needed to advocate family philanthropy with their clients. Many advisors view DAFs as simple, flexible and cost- effective tools that help them promote family philanthropy with their clients. Here are some reasons why:

Simplicity. DAFs typically use familiar investment products, methods, reports and procedures, so the learning curve for clients and back-room staff is easy. Set-up is quick, much like setting up a self-directed IRA.

Philanthropic Support. Leveraging on their programmatic skills and special knowledge of charitable need, community foundations do a superior job in offering a host of value-added services to donors in structuring and executing grant strategies. Back room support services typically include gift and grant processing, fiduciary oversight, donor record-keeping, status reporting, tax reporting and IRS compliance. Some programs offer online access.

Ongoing Participation. Advisors can now advocate philanthropy and continue to stay involved in the investment side of their clients' philanthropic activities after the gift is made.

Expanded Resources For Philanthropy. Because some flexible DAFs accept a broad range of asset types as contributions, more of a client's wealth is available for family philanthropy and it can be used in more creative ways.

Compatibility with Other Planning Strategies. DAFs compliment and even enhance the ability of advisors to promote existing charitable products and services. For example, with the client's DAF designated as charitable remainderman, the advisor can continue participation with the family's philanthropy when the trust terminates. The DAF can serve as income beneficiary of a lead trust.

Link to Next Generation. Working with the client's family in administering the DAF, the advisor has an opportunity to build professional rapport with those in the next generation who some day will inherit the parents' wealth as well as succeed them as donor advisors for the DAF.

Distinguishing the Practice. As a value-added service, DAFs can help advisors distinguish their practice among their peers and enhance their professional reputation with clients as a trusted advisor.

Conclusion

The need for financial services with a charitable component is abundantly clear. Given the flexibility, the simplicity and cost effectiveness that DAFs afford, professional advisors and their clients are now coming to believe that this practical tool of philanthropy becomes that point of intersection, a point where all participants--clients, charitable organizations, financial institutions and professional advisors--meet, work together, and mutually benefit in a way never before possible.

As one advisor said after having implemented a DAF as the charitable component of his client's overall plan: "The donor advised fund enhanced my reputation as a professional advisor. In the end my client said, Thank you."


Endnotes


Exhibits

Exhibit 1

DONOR ADVISED FUND COMPARISON QUESTIONNAIRE

Donor Advised Funds have become the fastest growing form of philanthropy in America. A number of mutual fund companies, traditional community foundations, and independent public charitable foundations now offer this service. Financial advisors and their clients should be aware that although many of these programs share similarities, they also offer distinct differences. Ultimately, the choice will be based on both a financial and a personal decision. This questionnaire will identify some of the more important distinguishing factors to support your evaluation and recommendation:

Organization:

  • Is the organization independent, or is it affiliated with another entity?
  • Does the organization manage money and/or provide financial planning services?
  • Are there any potential conflicts of interest?

Contributions:

  • What types of assets are eligible for contribution, e.g. cash, marketable securities, closely held securities, real estate, life insurance, interests in limited partnerships and limited liability companies?
  • Is there a requirement that the contributed asset be immediately liquidated?
  • Does the program permit contributions and grants to be made anonymously?

Costs:

  • What is the annual administrative fee?
  • Are fees scaled for larger funds?
  • Does the organization require a certain portion of the fund to be set-aside for its own purposes?

Investments:

  • What are the investment choices available to the donor?
  • Are contributions pooled or separately managed?
  • Can the donor's financial advisor play an ongoing role in investing the assets of the fund? If so, how?
  • How is he or she compensated?

Distributions:

  • Are there restrictions on distributions, e.g., geographic, religious?
  • Is there a minimum annual distribution requirement, or a maximum annual limit?

Other:

  • How flexible are the provisions for succession upon the death of the donor?
  • Does the program offer Internet access (and security) for contributions, grants, and donor statements, inquiry?
  • What do other professional advisors say about the program?

Exhibit 2

Ten Tips for Year-End Planning

  • If planning for a family foundation at year-end, consider a DAF. It is simpler and less costly than private foundations and can be transacted quickly.
  • Contribute mutual fund shares before the fund's upcoming December dividend.
  • Sell stocks that have depreciated in value first, and then contribute cash.
  • Use your credit card for last-minute cash contributions. Obtain credit card benefits if available, e.g., frequent-flyer miles.
  • Match your contribution with employer's contribution, if available.
  • Contribute disposable income generated from IRA accounts and offset income taxes with charitable deduction.
  • Contribute property no longer useful, e.g., life insurance policies, real estate, etc.
  • If a DAF is established at the end of the year and custody changes to a new brokerage firm, the fund should be set up by the host charity at the old firm in the current year. Then transfer custody to the new firm in the succeeding year.
  • If you normally contribute stock certificates to charities at year end, contribute them as a block to the DAF to obtain current-year tax deduction, then recommend grants in cash at some later time.
  • Unyielding dates to remember:

    • Check Money Wire. If mailed, it must be post-marked or hand-delivered to the charity by December 31.
    • Securities. The donor's properly endorsed stock certificate must be delivered to the charity by December 31. If a certificate is deposited in the mail, it must be post-marked by December 31. If securities are delivered to a broker, the date transferred to the designated charity must also be by December 31.
    • Life Insurance. Written confirmation from donor's insurance company of change in ownership, or the issue date for a new contract, must be by December 31
    • Real Estate. Copy of deed of transfer must be received by December 31. Some states require deed to be filed to complete transfer.
    • Limited partnerships/LLCs. Assignment letter must be received by charity no later than December 31.


Exhibit 3

Donor Advised Funds vs.
Private Foundations and Supporting Organizations
Feature Donor Advised Fund Private Foundation Supporting Organization
Set-up cost None Substantial legal and accounting fees Substantial legal and accounting fees
Typical Amount To Open $10,000 to $50,000 $500,000 to $5,000,000 $500,000 to $5,000,000
Valuation of Deduction Full Appreciated Value Cost basis except full appreciated for publicly traded securities Full Appreciated Value
Annual Income Tax Deduction as % of Adjusted Gross Income (AGI):
For Cash
50% 30% 50%
For Appreciated Securities
30% 20% 30%
Minimum Distribution Requirement None 5% of assets Same as DAF
Excise Tax on Investment Income None Typically 2% Same as DAF
Donor's Role in Decisions Varies: some allow "Virtual Control" Donor controls board Donor cannot control board
Administration Simple Complicated Very Complicated
Investment Options Varies: some allow wide choice of individual securities Wide range of securities Wide range of securities
Anonymous Giving Yes No Yes
Succession at Death Varies: Some allow successor in perpetuity Board names successors Board names successors



The original version of this article appeared originally in the November 2001 issue of CCH's Journal of Practical Estate Planning, published and copyrighted by CCH Inc., 2700 Lake Cook Road, Riverwoods, IL 60015. This revised version was published on the Planned Giving Design Center on November 30, 2001


  1. Harvy Lipman, Survey Finds Rapid Rise in Assets and Grants of Donor-Advised Funds, The Chronicle of Philanthropy, May 31, 2001, page 10.back

  2. See Exhibit 3 for a comparative summary of family foundation alternatives.back

  3. See Exhibit 1 for questionnaire to be used in evaluating DAF programs sponsored by various host charities.back

  4. Doing Well By Doing Good: Improving Client Service, Increasing Philanthropic Capital: The Legal and Financial Advisor's Role, The Philanthropic Initiative (TPI), Inc. Boston, Massachusetts, June 2000back

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