Who wins when Financial Advisors, clients, and Donor Advised Funds work together? Everyone.
At Place2Give, we help people set up Donor Advised Funds to help meet they philanthropic goals. But what is a Donor Advised Fund and how can Financial Advisors benefit from this tool?
As a Financial Advisor, you likely have clients with significant life events happening, including:
- A liquidity event or expansion of wealth, e.g., the sale of a company
- A new need for tax planning to offset gains or growth
- An update to their Estate and/or Will
- A life-altering experience or scare, consequently resulting in an emotional desire for strategically impactful philanthropy
When advising clients, an often-overlooked option is to create a Donor Advised Fund.
What is a Donor Advised Fund?
A Donor Advised Fund (DAF) is a philanthropy management vehicle.
This public charitable foundation is an “umbrella” to several funds often housed within a financial institution, independent public foundation or community foundation. A DAF account is established with an initial donation from a single donor or group of donors, resulting in a fund you designate a name, e.g., the Smith Fund. The managing entity issues a charitable tax receipt for any fund contributions. All donations provide a tax benefit for the donors. Donors can make charitable contributions from the fund at any time. Moreover, the Donor can take some time to consider how best to deploy that capital, engaging loved ones and their network in the decision-making. The donor accordingly dives into learning more about the issues and charitable options.
How does a DAF work?
Similar to public charities, DAFs are highly regulated; a Board of Directors oversees the entire public foundation. Fund financials are shared concurrently on the CRA website and the Foundation’s website, at the foundation’s discretion. In addition, many Foundations share fund allocations to the community each year. Other layers of oversight may include a group of issue-area Advisors, a formal committee of family members who make grant-making recommendations or a network of community members who provide insight on localized issues to the Foundation’s leadership. Finally, as a Donor Advised fund, the account holder advises the operating foundation of their grantmaking, with oversight from the Board of Directors.
The Fund is then invested for growth and sustainability at the direction of a Financial Advisor or managing institution. The timing, movement, and amounts of the disbursements are at the direction of the Board of Directors. In Canada, a 5% fiscal annual minimum disbursement is required from a DAF, increased from 3.5% in 2022.
The structure of a DAF is unique to the parties involved. Some charge fees to the Advisor to retain assets under management (AUM) within their portfolio. Others do not charge fees, however, many provide flexible options for donors and wealth managers. Just like any financial product, fees vary by service provider.
With Place2Give Foundation, the Financial Advisor also retains advisory privileges. The value of the DAF is part of your total client portfolio under management. As Advisor, you direct the investment of the assets within the Fund, while your client explores giving options.
Each DAF uniquely manages donor reporting. In most cases, the Grantee reports back to the Foundation and shares this information with the Donor. Additionally, the Foundation may provide unique learning opportunities and site visits for the Donor so that they can gather additional intel and insights on the issue(s) that are of interest to them.
Financial Advisors see mutual benefits by incorporating DAF’s into your financial service offerings to clients.
Benefits to the Donor
- Donors and their network can continue to contribute to the fund as often as they would like.
- Donors can balance tax planning needs with the Fund’s philanthropy goals.
- The Fund structure allows for time to perform due diligence on potential grantees to ensure alignment with Donors’ goals and values.
- The Board of Directors handles the administrative and governance responsibilities for the Fund, removing the burden from Donors.
- The Fund receives sector research and support for philanthropy and legacy planning to maximize social impact.
Benefits to the Financial Advisor
- Retaining the value of the Fund within your client’s total portfolio under management.
- Balancing your clients’ tax planning needs with their philanthropic goals.
- Ensuring the Fund’s growth strategy is in alignment with your client’s personal investment philosophy.
- Creating a closer relationship with clients around long term goals and legacy planning.
- Maintaining control of the Fund’s investment growth based on an existing trusted relationship with your client and their investment tolerances.
Read more about how Place2Give’s program for financial advisors works.
How does a DAF work? A simple example.
After opening the account, the Client (Donor) subsequently grants out an annual minimum of 5% of the Fund to charity(ies). The balance of the Fund, at the direction of the Financial Advisor, grows over time. In addition to generating investment growth, the Donor’s family and friends can add additional funds, thereby increasing the Fund’s assets. The Donor will always have to disburse a minimum of 5%. As the fund grows, these funds reach further, allowing for more significant single contributions or a broader approach. As the fund evolves, your client accordingly can make more planned donations (multi-year commitments).
Working with a Philanthropy Advisor, the Donor explores the issue(s) they want to impact. The Financial Advisor can design an investment strategy to meet those objectives. Accordingly, through analysis, research, and feedback the Foundation identifies opportunities the Donor can support and provides instruction to the operating entity to release funds.
Additionally, the client leverages their network to continue to grow the DAF. This helps to continue growing the Fund, increasing its impact and reach.
How can Place2Give help you?
We can help set up and manage your Fund. To learn more about Donor Advised Funds, visit Place2Give or start your Fund today. Leverage the knowledge and expertise of the philanthropy advisors and researchers who support our Fund donors. Contact us today to get started.