By Mary Snow
The holiday season is not just a season of giving gifts to friends and family — for many, it’s also a season of giving philanthropically. With the December 31 deadline for this year’s charitable contributions, donors can feel rushed without the right tools from their advisers that maximize philanthropic effectiveness and tax efficiency. In this environment, donor-advised funds are emerging as a strategic tool for clients who seek tax efficiency alongside philanthropic effectiveness.
For financial advisers, particularly those in wealth management, DAFs represent an effective way to enhance clients’ tax planning while aligning with their charitable goals. A DAF allows clients to donate a range of assets — from cash and securities to real estate — while benefiting from immediate tax deductions. Once in the DAF, assets grow tax-free and can be allocated according to the donor’s philanthropic vision, offering a streamlined alternative to establishing a private foundation.
How donor-advised funds work: A simplified approach to giving
Banks and financial advisers can play a pivotal role in helping clients establish and manage DAFs, offering them clarity on fund management and distribution processes. A DAF is created within a Section 501(c)(3) nonprofit organization that manages the fund, while clients retain advisory privileges over grant distribution. Clients can strategically donate appreciated securities held for over a year, for instance, avoiding capital gains tax and increasing the funds available for charitable causes.
A DAF has some functionality like a personal foundation for their giving, but much easier to manage — a vehicle that can grow tax-free and distribute resources directly to the organizations that they prioritize and care about. DAFs provide donors the flexibility to make donations now and recommend grants later, without minimum payout requirements; funds invested in the DAF grow tax-free, amplifying future philanthropic impact, and the record-keeping requirements are much simpler for the client.
Finding the right nonprofit partner
Choosing the right nonprofit to manage a DAF is crucial, and banks can guide clients in this decision. A partner with strong experience in managing DAFs can handle the administrative details and back-office work, while also providing personalized support. (In addition to referring clients, some banks sponsor their own nonprofit DAFs or offer clients access to them through white-label relationships.)
Once a client establishes a fund, it will be invested for growth, and bankers/financial advisors should advise clients on how their partner nonprofit approaches this critical task. Clients will be able to take a hands-on approach, or they can let their partner nonprofit drive the process. With the fund in place, invested tax-free, the next step is perhaps the most important: how will the clients’ plan be put into action? How will their DAF distribute donations to reflect their ideals — now and on a regular basis in the future?
This is where a strong partnership once again becomes vital. Clear lines of communication, responsive action on distributing donations, and powerful advice on giving opportunities — all of these elements are needed from clients, bankers and the partner nonprofit.
Enhanced relationships, lasting effects
Recommending DAFs provides bankers with an opportunity to engage clients more deeply, aligning with their interest in purpose-driven financial planning. The year-end is an especially valuable time to discuss these options, as banks can help clients establish a DAF before December 31 to achieve immediate tax benefits and begin their own philanthropic journeys.
DAFs not only simplify the giving process but also empower clients to create a lasting impact. Through careful planning and collaboration with trusted financial advisors, clients can maximize their charitable giving, achieve significant tax benefits, and establish a legacy of giving that reflects their values. By taking action now before the year ends, clients can still achieve important tax deductions while beginning their new philanthropic journey in earnest.
Mary Snow is CEO of the Coral Gables Community Foundation.
