S1, E4: How to know when a DAF is right for your clients

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

In our fourth episode, Kim Ledger and planned giving expert Kyle Christopherson, MBA, CFP, head of Strategic Growth Services at Ren discuss the key information and benefits that indicate when a donor-advised fund is the right giving vehicle for your clients.   

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Transcript

Welcome to Ren's Philanthropic Insights video podcast series. Made to help financial advisors make the most of their clients 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 Christopherson, SVP of Client Growth, to dive into the topic of different ways advisors can leverage DAFs for long-term impact.

To give you some background on Kyle, he has over 20 years of experience in every aspect of creating and administrating 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 planning strategies. Welcome back, Kyle.

Thanks for having me again. It's good to be back.

It's been a lot of fun. This is our fourth session together, and yeah, we've been talking a lot about charitable giving and have dived into donor-advised funds specifically. And last time, we spent some time on how to have that charitable giving conversation. 

Yeah, that initial conversation with clients.

Exactly. So, given the popularity of DAFs, how do you know if a DAF is the right option for a client? 

Certainly there's some things that you can look at. When you're reviewing your client portfolio, and let's say you've just learned about donor-advised funds, you're going to go back and start looking for clients that might be able to benefit from either charitable giving, donor-advised fund in general, there's definitely some key things that you can look at when you're reviewing their portfolio.

First of all, do they have an overly concentrated position in a certain security - stock, or mutual fund – that maybe they need to diversify from, and they're going to need some tax advantage planning for that. Maybe it's just a highly appreciated asset that they might be looking to liquidate at some point in time in the future. You can start planning the seed for a donor-advised fund in the future when they're ready to come to that point.

There's also a lot of clients that, you know, they might just have high earnings year. Maybe they received a large bonus. Maybe they received an inheritance. Even if it's not going to be taxable to them, they've received a windfall, if you will, and they want to do some charitable planning. A lot of times when clients receive an unexpected increase in earnings, they like to give a portion of that over to their charitable organizations they support.

Shares that are vested. 

Absolutely.

Some lifestyle changes. So if they are nearing retirement, you know. For a classic example, are those clients that maybe have rental properties and they're trying to wind down and simplify their life a little bit. You know, if they're going to be reaching that stage, then it might be time for you have to restructure some of their assets, which could include liquidating some of the real estate. And, you know, that could be an opportunity for a donor-advised fund to avoid some of that capital gains tax, get a charity deduction. 

Sure. That makes sense. There was an advisor that I had worked with that as he was looking at his own situation, one of the things he wanted to do was get his kids or his grandkids involved in giving and begin to teach them. And, you know, we've talked in some of the other episodes about that legacy planning and multi-generational. And this guy brought his grandkids in and said, all right, you guys, we're going to, you're going to each do a presentation on your favorite charity, you're going to present it, we're going to all get together, you're going to present it. And then at the end, I'll, I'll decide which charity we're going to give to you. So you better bring your A game. And you know what, he said that those kids age seven to 17, showed up with their presentations. And he said they just killed it. But the thing that struck him the most was that he learned a lot about his grandkids that day. And the way that he would never have learned otherwise. What was important to them? What causes were meaningful to them? And he was so excited. He said, I just hit the table and I said, we're going to give to them all. You saw that coming, didn't you? 

Yes.

So yeah, grandpa wasn't going to say no to anybody. So they've, but since then they've made it an annual tradition. I mean, what a great legacy for those kids.

And so that's just something to listen for when you're talking with your clients. Are they worried about the next generation and passing on their values? And charitable giving is a great way to get your children engaged with the community.

That's one of my favorite stories. And I've shared that with donors and advisors over the years. And I've had multiple people who've said, I want that situation. And they have done it for that very reason. So it's a great, I love that story. I'll probably keep telling it.

I definitely would. And there's some great stories about that with parents and their children and how they've given them a certain amount of grant out to charitable organizations. I would say the last thing that I would talk about is looking for those clients that are giving a lot to charity. Maybe very frequently. Are they giving large sums every year on a regular basis? Are they giving very frequently? Because a donor-advised fund could be an opportunity for them as well.

Yeah, that's a great point. Make life simple, as we talked about before.

Absolutely, streamline your charitable giving. 

So are there any creative strategies for using a DAF?

Yeah, and there's a lot of great strategies that you can utilize with a donor-advised fund to help provide some financial and tax advantage benefits to your clients. And a lot of them are financial tax advantage planning, but they could be some, you know, the emotional aspect and the charitable giving aspect as well. But certainly, when it comes to the tax advantage plan, we talked about the income tax deduction. We talked about avoiding the capital gains tax. So that becomes very important when you're looking at a situation where maybe you need to do that portfolio reallocation. Where you've got over concentration in certain security, like we talked about before, some of those flags that you can identify. And you could put some of that security into a donor-advised fund, get a charitable deduction, avoid the capital gains tax, and then you use the charitable deduction to help offset the portion of those securities that was sold outright. It's not an all or nothing kind of scenario. It's something where you can give a portion of it and utilize the tax deduction to sell the other portion outright.

I think that's a great point. It's not an all or nothing.

Yeah, it's not an all or nothing. And that's a very frequent question that we get a lot of times. I think another important one as well as it relates to tax advantage planning is, you know, the Roth conversion. You know, are you converting from, you know, a traditional to a Roth? Well, there's going to be a large taxable event. 

Yeah, one of those high-income years you mentioned. – 

One of those high-income years. That's a perfect example of what could trigger those high-income years. And you can utilize a gift to a donor-advised fund to help offset some of that taxable event.

Yeah, that makes sense. That makes sense.

A great strategy that you can also look at is it dovetails into, you know, trying to create that share reduction for a significant tax year, significant income year. Is, you know, if your client is giving, you know, we talked about those frequent gifts to charity. But if they're giving on a regular basis, let's say they're, it's $20,000 a year to their charitable organizations that they're supporting. And they do that every year. Well, if you've got a high-income year, why don't you think about front loading some of those charitable contributions? Take the next five years’ worth of charitable gifts. So $20,000 a year for five years, put $100,000 in today, get the larger charitable deduction. And then every year after that, you give out the $20,000 that you normally would have to those charitable organizations. And that's benefited a lot of clients to help offset some of those high-income years. 

They call that bunching, right?  Bunching. That's when you hear that term, is that what they're talking about?

Bunching strategy, yes, absolutely. And it also has an additional benefit, not just for the high-income earners, but also for those individuals that can't get above the standard deduction threshold. So with the standard deduction going up a few years back, unless you have over $25,000 or so to, with itemized deduction, you're not going to get over that threshold. So any money that you give away to charity, although you're claiming it, it's not providing any benefit. So that bunching strategy that we just talked about is a great way to be able to take advantage of that income tax deduction.

In addition to tax strategies, are there other ways that, or strategies that you can use, a donor-advised fund? 

Yeah, there was a very popular one is also, let's say a scholarship. 

Yeah, we get a lot of questions about scholarships. 

We get a lot of questions about that. And there's a lot of clients out there that want to support their university. It could be even a private school that they grew up with. And to be able to provide that support ongoing and have support future students with your family name attached to it is very meaningful for them. And so we get that question a lot. How do we support or fund a scholarship? And what we typically suggest is, you can go to your school, you go to your university, work with them to establish that scholarship. They have the committee, they'll go through the vetting process, find the recipient. 

Yeah, 'cause there's specific rules about that. 

There's very specific rules that you have to follow. And that's kind of a best practice to let the school be responsible for that component. But then you use your donor-advised fund to make grants on an annual basis, semi-annual basis offer often you need to fund that scholarship on an ongoing basis. And there was one advisor that I worked with that was working with their clients that it came to us and said, you know what, I have this client. Their son had recently been killed in a car accident and he was going to this school. And what they wanted to do is create a memorial scholarship fund in their son's honor. So that this scholarship at the school would fund for future students and also be a memorial to their son. So, you know, very powerful story and, you know, just another way that you can utilize a donor-advised fund. 

That's great. That is, again, it gets to the deeper client relationship piece of it there. Are there specific assets that are ideal for a donor-advised fund?

There are specific assets. Cash, very easy, very straightforward. 

Kind of expensive? 

Kind of expensive. As far as you don't get the double? You don't get the double tax benefit as far as avoiding the capital gains tax. So, by default, you're always going to want to look for those highly appreciated assets. And then typically that's going to be any publicly traded security, stock or mutual fund that's appreciated. And a preference that might say, and from a non-qualified account. 

Yes. Good point. 

You want to stay away from the qualified accounts during your life. Right. But from a non -qualified account, you know, those appreciated assets are very beneficial. But, you know, sometimes when, you know, I'm speaking with financial advisors, you know, they are very focused on the cash or the publicly traded securities. But there's a whole other aspect that you can consider for donor-advised funds that you may not realize. And that's getting into what we refer to as complex assets, which is... 

Near and dear to my heart. 

Very much so. Which you are an expert on. 

Yes. Love that. 

And, you know, that's basically any asset that's not sold or purchased on the public stock exchange. So, when you think about complex assets, right? That's closed sale businesses, tangible assets, real estate. Lots of things. I bet you got a lot of great examples for that too. 

I do, but I'm going to save those for another series. And you guys, I have a whole series coming out on that. So, hang tight on that, because we've got a lot to talk about with complex assets, but generally speaking, there's a lot that we can do with complex assets and donor-advised funds. Definitely worth having the conversation. 

Well, thanks so much, Kyle, for joining me again today. 

My pleasure.

I look forward to having you back next time when we talk about collaborating with other, with your clients, other professional advisors in their charitable planning. So looking forward to that.

Thanks, Kim. Looking forward to it. 

Yeah, thank you. 

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 topics about planned giving you want us to talk about. And, of course, don't miss the great information we have in our Advisors Philanthropic Insights newsletter. Subscribe at reninc.com/advisorinsights. 

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