Beyond the Donor-Advised Fund
DAFs aren’t the only way for clients to give.
A new Fidelity white paper found that three out of four (76%) high-net-worth investors want philanthropic guidance from their financial advisor, but only one third (36%) say they actually receive it. That’s a missed opportunity if I ever heard one. Among respondents who did have advisors helping them with charitable giving, seven out of eight (87%) said their satisfaction with the advisor increased, 85% reported greater trust in their advisor, 88% were more likely to refer their advisor to others, and 92% were more likely to retain their advisor. And here’s the kicker: 94% of investors whose advisors helped them with charitable giving said the assistance improved the overall impact of their giving, according to Fidelity.
Like clients, surveyed advisors also said their practice benefited when they started offering charitable giving. Fidelity research found that two-thirds (67%) of advisors who proactively engaged clients on charitable giving reported enhanced trust among clients; 54% experienced improved client retention; and 32% uncovered hidden assets among clients as a direct result of their work with clients on charitable giving.
Even when discussing donor-advised funds with clients—charitable giving 101—a recent TIFIN study found that advisors who began incorporating DAFs into client conversations saw a significant increase in their business and the quality of client relationships.
“Philanthropy creates continuity,” the TIFIN report concluded. “It introduces family members. It opens values-based conversations. It turns episodic planning into an ongoing relationship. Growth follows trust, and trust compounds when advisors help clients give with intention,” concluded TIFIN.
While I’m thrilled to see evidence of the benefits of planned giving, the advisor community still has a long way to go. I say this based on the number of advisors who call me needing assistance with basic charitable planning for a client, and they don’t seem to have any idea where to start. So, they default to DAFs.
DAFs are easy. They’re essentially charitable checkbooks. They have their place at the charitable giving table. Most major brokerages, charities and local community foundations have their own DAFs. But there are many other giving tools available, which I’ll get to in a minute. If nothing else, DAFs can help clients get started on the path to strategic charitable giving.
A DAF is generally better than writing checks because it offers immediate, maximum tax deductions while allowing the donor (your client) to recommend grants to charities over time. DAFs allow tax-free investment growth and the donation of appreciated securities to avoid capital gains taxes. They also simplify recordkeeping by consolidating donations into one annual receipt.
Beyond DAFs
Once clients are comfortable with a DAF, you can get them interested in more advanced charitable planning tools that can be even better for growing your business. If you’re a smart advisor, you make the conversation about more than just the transaction and tax efficiency. You can talk to the client about where they’re going to give, how they’re going to give, when they’re going to give, how they’re involving the kids, and whether the gift will last just for the parents’ generation or for multiple generations. The conversation should be about more than money management.
Again, DAFs have many advantages, but they’re just one tool you should have in your charitable giving advice toolbox. They’re not the right tool for all your charitably inclined clients. That’s a common mistake. Some clients may want to give up the assets to avoid capital gains tax, but they still need the assets to produce income. In those cases, a charitable remainder trust, a charitable gift annuity or a pooled income fund makes more sense. Once you give that asset to a DAF, it’s gone.
CRTs, PIFs and CGAs are superior to DAFs when the primary goal is to generate a lifetime income stream, avoid immediate capital gains tax on highly appreciated assets and reduce estate taxes. Unlike DAFs, which are for immediate donations, CRTs, CGAs and PIFs allow clients to diversify assets, receive income and defer tax.
Consider a DAF if your client wants immediate tax deductions, simple, low-cost administration and flexibility to recommend grants to charities over time.
Consider a CRT, CGA or PIF if your client needs income, has highly appreciated assets to sell, or wants to reduce estate taxes.
Real World Example
We recently worked with a California business owner who was approached by a private equity firm to buy his successful contracting business. Like many successful owners, our client’s business accounted for 75% to 80% of their net worth. Though he wanted to avoid the 37.1% long-term capital gains tax, he couldn’t afford to use a DAF because he needed the proceeds to replace the business income. Before the $30 million sale, we were able to carve out $10 million in assets, representing his personal goodwill, and donate them to a PIF. That created a $6 million charitable deduction, which offset much of his capital gains. Thus, the owner avoided paying $10 million in tax, resulting in more than $3.7 million in tax savings. Even better, the owner is now receiving income from the full $10 million that’s in the PIF. Not bad.
Once you have opened the door to charitable giving with your clients, keep it open. Don’t just make your relationship about investment performance. Make it about life fulfillment and purpose.
