S1, E2: A complete guide to donor-advised funds

This is the second of five episodes in our Philanthropic Insights series that offers advisors an intro to planned giving and dives into how to leverage donor-advised funds for long-term impact. 

In our second episode, Kim Ledger continues the conversation with fellow planned giving expert Kyle Christopherson, MBA, CFP, head of Strategic Growth Services at Ren to offer financial advisors a complete guide with everything they need to know about donor-advised funds (DAFs).  

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Visit reninc.com or email us at consulting@reninc.com to learn more about Ren and how we might be able to help with your philanthropic program needs or to share questions or topics about planned giving you want us to talk about.

Until next time, keep giving wisely.

Transcript

Welcome to Ren's Philanthropic Insights video podcast series, made to help financial advisors make the most of their client's charitable giving. I'm your host, Kim Ledger, Ren's VP of Complex Assets, and I brought in one of our experts from Ren, Kyle Christofferson, SVP of Client Growth. 

We're going to dive into the topic of different ways advisors can leverage DAFs for long -term impact.

Here's a little background on Kyle. He has over 20 years of experience in every aspect of creating and administering various charitable gift instruments. He's a frequent presenter at national and regional conferences, educating financial professionals, and planned giving officers on how to create effective charitable planning strategies. 

Welcome, Kyle. 

Hi, Kim. 

It's great to have you back.

Great to be here. Thanks for having me. Episode two, yes. Excited. 

Yeah, I am too. It's one of my favorite topics, donor-advised funds. It's a world I live in every day, all day, every day, so it's one of my favorite topics. So glad you're here. 

Looking forward to the conversation. It's such a cool tool that a lot of people are taking advantage of today, and it's fun to be able to talk about it.

I thought today we would talk about how a DAF works. -Sure - And so my first question is, are DAFs popular today? But before you answer that question, though, I want to point out that DAFs have been around a long time. They've been around ever since 1930, the '30s. 

Well, a lot of people didn't realize, right? 

I know. I think it was community foundations and other charitable organizations really got unpopular back in the 1930s, and that's what a lot of associated donor-advised funds with community foundations. And it wasn't until 2006, when the Pension and Protection Act was passed that they really, they got some formal recognition. And then I think we saw them really start to take off. 

Right, right. So are DAFs popular today? 

Oh, absolutely. DAFs are growing by significant amounts year over year. And in fact, when I think back on 2006, the number of donor-advised funds that weren't existing at that time was roughly about 115,000 or so different donor-advised fund accounts. And you look from 2006 to 2017 and that number tripled and - great growth, right? - But then just from 2017 to 21 in four years, it tripled again. And that growth trajectory for donor-advised funds is growing and growing. And I think it's kind of an analogy that you could look to is remember when 529s first came out?

Yes.

And people would hear about a 529 and say, oh, well, what is a 529? How does that work? And now 529s are very common. In fact, when you're going over to your neighbor's house, you're having dinner with them and you talk about, oh, if you've been funding your 529, when did you set up your 529? Someone has a baby, did you set up your 529 yet?

And I think that's the same trajectory we're going to see with donor-advised funds as well. 

Can you imagine being at a friend's house and not having to explain what a donor-advised fund is?

Yes, exactly. Everyone knows what a donor-advised fund is. 

I look forward to that day. 

A lot of people have heard about a donor-advised fund, but they're not exactly sure what that really means. 

Well, today we're going to talk about how a DAF works. One of the things that I really like about a DAF is that these are dollars that get set aside for charity, specific to charity. I know ups and downs in the market, there's a lot of volatility in giving to charitable organizations, tends to go down in a down market, but I love that these dollars are set aside. So you have, it seems like there's more consistent growth. Or when you have some sort of disaster, you have there's cash available immediately to grant to organizations. I think about COVID and the pandemic in 2020. And when that hit, we had our staff was busy like it was giving season, making grants to organizations that were supporting those efforts. So other disaster relief too. 

The pandemic and Hurricane Katrina, that's a good example. - Ukraine - Seeing all the support go out for the Ukraine disaster relief. And, you know, what's nice about those donor-advised fund assets is you don't have to come up with assets to give to charity and support that relief. It's there ready to go. 

And I think when you look back at, you know, donors and we've looked at some surveys, like what happens in a down market? 

You know, a lot of times when you're in a down market, even talking about disaster relief, well, the needs for community organizations and those charitable organizations grow as more people need those services. And a lot of clients that give to charity, a majority of them are concerned about that. They're concerned about that pressure that's on those charitable organizations. And instead of pulling back their giving, they're wanting to give more because they know the needs are accelerating on that charitable organization.

And so it's the disaster relief. It's even in the down economy. The grants from the donor-advised fund is a great tool to be able to support that charity immediately. 

It is. So talking about how a DAF works and what are the benefits? I mean, I think we've hit on some of the benefits. But how does it work? 

Yeah, we talked about some of the benefits in our first episode, the last episode we did together and talking about how it's kind of like having your very own private family foundation. 

We've heard of some of the big foundations out there and they make these large grants to different charitable organizations or disaster relief like we're talking about. And it's kind of having that same look and feel but without having to be a millionaire without having to have those significant assets to throw at it.

And so when you're looking at a donor-advised fund, every donor-advised fund program has a qualified public charity that's sponsoring the program. So when you're making a gift to a donor-advised fund, you're actually making that gift to that public charity. So it's no different as far as the income tax share reduction that we discussed in the last episode and avoiding the capital gains tax, no different than giving an outright gift to a charitable organization, exact same results. - Got it -  But the difference is now you can have those funds segregated over at that public charity to be granted out to future charitable organizations, future grants to those charitable organizations when you want to be able to support them. And what's great is you get to call that fund after the family name.

So I could call mine the Christopherson Family Fund. And so then when I'm ready to have some of those funds go out and support a charity, I go to that donor-advised fund program, I submit a grant and I say, I would like this to go to the local Humane Society for $500. And then that grant's going to go out to that charity. And it's going to say, here's a grant from the XYZ donor-advised fund program from the Christopherson Family Fund to be used for your general purposes or whatever your purpose restriction is.

But it's just a great way you can get on your smartphone, tablet, computer, and be able to log in. And within a couple of minutes, you've submitted a grant to go out to that charitable organization. I think it's important to point out too that the charitable deduction has already, you know, you don't get another charitable deduction from making that grant or recommending that grant, I should say. And I know we get people that are a little panicked at year-end thinking that they have to get that grant out from a deduction perspective.

And you've already received the, yes, getting the initial grant to the donor-advised fund or your contribution to the donor-advised fund, but the grants then from there don't have a time limit like they do.

And that's a big concern. And that's why we see so much terrible giving at year end is because that's when the clients are meeting with their CPAs and saying, okay, how much taxable income do I have? Okay, you have this. So now we need to get a charitable deduction of X amount to be able to offset that income, right? And so they're always thinking that it has to be to the charity by the end of the year. But with the donor-advised fund, that doesn't mean you have to make the grant to that charity by the end of the year. What it means is you need to make the contribution to the donor-advised fund before the end of the year.

And you get that charitable deduction immediately when the contribution is funding at your donor-advised would account. But then we'll go into next year and then you can start making those grants and it's not going to impact your receipt of that deduction.

Yeah, and I love that. It requires little maintenance from the donor.

Oh, absolutely, absolutely. 

And I think sometimes people will use these for that next generation as well, leaving a legacy for, you know, they'll fund a donor-advised fund to leave that for the next generations as well. – 

Yeah, and that's a nice thing about the donor-advised fund. It's a common question that we get asked a lot. Well, what happens when you pass away, right? And, you know, there's different options that are available for that. You can have all the funds distributed out to the charitable organization immediately when you pass away.

But the most popular option is to simply have your children, your heirs take over as the grant advisors. So the ones that are determining how that grant is going to go out to which charitable organization.

Now, how does a donor-advised fund compare to a private foundation? I think there's some similarities and some differences. You had commented earlier that they're similar. 

They're definitely similar. So when you're looking at a private family foundation, what we're talking about in that instance is a private non-operating foundation. And they're going to do the exact same thing as a donor-advised fund. You're making a complete a gift. you get an income tax charity deduction, and then over time, you're making grants to qualified public charities. So identical, but the difference is with a private foundation, you're actually creating a private charitable organization. So you're going to have to have an attorney involved to draw up the governing documents set up in either a trust format or a corporate format. You're going to need to have officers involved, trustees involved to run the foundation, but you are running an actual organization. So you're responsible for all the accounting, the compliance, the tax filing, state filings every year, making sure that the charities that you're making the grants out to are the qualified public charities.

So there's a lot of work involved in running that foundation. So unless you have significant dollars to commit to a private foundation, you know, a lot of times it just doesn't make sense if all you're doing is trying to take a complete a gift and spread it out over time to charity that you can do in a donor buys fund.

And I work with a lot of family offices and they'll have the staff and they'll have the amount of dollars in a private family foundation where it makes sense.

Absolutely. 

They may have specific causes that they want, but they'll have staff that surround that private foundation. And I know that DAFs and private foundations can complement each other.

Oh, absolutely. You absolutely can be a complementary tool, because, you know, one of the key differences between a donor-advised fund and a private foundation, we talked about this set up, you know, with a donor-advised fund, it's what 15 minutes to complete the application and you've got your account ready to go. Much more long and, you know, legal process involved with setting up the private foundation.

But when you're making grants from a private foundation, all of those grants are going to be on the 990 PF, the federal tax return. It's public information.

But with a donor-advised fund, you can remain anonymous if you want to. So sometimes when private foundations, they're trying to make some grants maybe to a local charity that knows those donors very well.

Maybe they want to maintain their privacy. You can't do that with a private foundation. So sometimes private foundations will establish a donor-advised fund where they can make a grant to the donor-advised fund account and then from the donor-advised fund you can make that anonymous grant to that public charity.

In other ways I've seen that work is that the private foundation will set up individual DAF accounts for the kids. So there may be a family mission that that the main foundation makes gifts to that support certain causes and then the errors or that that legacy piece they'll use the DAF, individual DAFs for individual family members to not have to get approval. They can just make grants from each other DAFs to their own accounts to support the charities that they support.

Exactly. You know, that's a great point too and that's something else that you can do with the donor-advised fund account. We mentioned having the heirs takeover, successor, grant advisors, but you know what happens if you don't get along with your sibling and you can't agree on the chair of organization and that's not a bad thing it's just you got different passions and different organizations that you want to support. That's normal. There's no need for it. So you can actually split that donor-advised fund account into separate accounts for each of the siblings to be able to have their own portion to make grants to.

Yeah, that's great. Now what about you know if there is a private foundation maybe it's no longer something that maybe it's dwindled down, it’s a smaller private foundation. Can that be closed down and moved over to donor-advised fund? How does that work? 

That's a great question too. And again, a similarity between a private foundation and a donor-advised fund is the grants have to go to a public charity. So when we're looking at a private family foundation, they are able to make grants to a donor-advised fund account to fund that because the donor-advised fund account is sponsored by public charity.

So it's totally permissible. And sometimes that happens if maybe the value of the private foundation has gone down to, maybe it just doesn't make sense to, you know, keep the upkeep, the filings. You know, we've had some situations where the children have taken over the private family foundation from the parents that were running it. And, you know, they've got other competing priorities. Maybe they're running their own business, something else is going on in their lives. And they just want to be able to make the grants and that's all they're interested in. Then you could also make a grant from that private foundation into a donor-advised fund and simplify the process that way if you need to. 

I've been involved with some of that. And some, that it's just, it's not, you know, they've, they've, they're not as large as they once were. So they'll make that and it just from a cost perspective. And they just simplify. 

Well, so we've talked about, you know, what happens when the donor passes away. And anything else on that that you wanted to talk about?

Like, I think we talked about the, you know, that you can name successor advisors. What else - are there other options besides the naming a successor advisor? Is that you just, you have to name somebody, then they take over at that point or other options. 

You know, naming a successor grant advisor certainly is the most popular. That's what we see most often with the donor-advised fund programs that we work with. But not the only option. We do have the ability for the donor, when they pass away just all the funds to go to a list of charitable organizations that they wanted to support, just to lump some payment. But sometimes the donors may say, “You know what, I don't have any heirs, but I would still like those funds to be dispersed over a period of time to make sure that the charitable organization that I'm supporting has funds for a number of years into the future.” It's not just to lump some gift and then it's over." 

Kind of like an endowment. 

It's kind of like an endowment. Like what we talked about last time. You know, setting up an agreement where you say, “You know what, I want 5 % of the annual value to go to these charitable organizations for the next 20 years.” Whatever it might be.

So really understanding what the donor is looking to accomplish, what their goals are for after they pass away, and making sure that we structure the donor-adviced fund to provide the benefit.

Great! Well, I appreciate you coming by today, and I'm looking forward to our next topic. On our next episode we'll be talking about how to have that charitable giving conversation.

Yeah, beginning the charitable conversation. 

Yeah, we talked about that in the first episode, and now we're gonna dive into that a little bit more. 

Yeah, I think that'll be really helpful. So I'm looking forward to that. 

So I'll see you next time, and appreciate you being here. 

Thanks, Kim. 

Thanks for watching, or if you tuned in via podcast, thanks for listening. If you want to learn more about Ren and how we might be able to help with your philanthropic program needs, visit reninc.com or email us at consulting@reninc.com.

We'd also love to hear if you have questions or if there are topics about plan giving you want us to talk about. We'd be happy to do that. And of course, don't miss the great information we have in our Advisors Philanthropic Insights newsletter. Sign-up at reninc.com/advisorinsights. 

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Until next time, I'm Kim Ledger. Give wisely.