Financial advisors now have an important example to point to when explaining a key limitation of donor-advised funds: Sponsors retain the final say over where charitable dollars go.
Recently, a prominent charity stopped being an option for clients of large donor-advised fund sponsors. Charles Schwab, Fidelity and Vanguard each
"In this country, you're still innocent until proven guilty, but I think a lot of companies just don't want to be exposed to any bad news," said Kashif Ahmed, founder and president of Bedford, Massachusetts-based American Private Wealth.
The episode serves as a reminder for advisors — and their philanthropically minded clients — about what it means to use a DAF.
While donors can recommend charities and
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"You only have advisory privileges," said Jane Searing, a managing director in Deloitte Tax's private wealth practice. "You don't get to decide where the funds go. You can only advise once it's in a donor-advised fund, hence the name."
Knowing a fund's philosophy is important for choosing the right one.
"Clients need to understand ahead of time — 'What is the philosophy of the particular fund that I'm looking to use?' — and ensure that that matches up, because when we look at different hosts of donor-advised funds, they have different philosophies on how long the assets can sit there without a distribution and what are the proper causes to be supported," said Mark Parthemer, chief wealth strategist at Glenmede, a boutique wealth management firm founded in Philadelphia. "So it's important there, also, to have those conversations before the account's open, before assets are contributed into it, to understand how the decision is going to be made on distributions."
Tax advantages
One example of when donor-advised funds can be useful is when clients want to bunch donations into a single year to maximize tax deductions.
Especially since the standard deduction almost doubled, Parthemer said his clients combine three to five years of intended contributions into a single year and, in later years, take the standard deduction.
"A donor-advised fund is basically a parking space where they can take all of those deductions, bunch them into the current year, put them into the donor-advised fund, get the deduction, maximize their multiyear income tax benefits and then dole it out at the regular cadence they would have anyway," Parthemer added.
Advisors generally guide clients to look three to five years into the future when doing tax planning, including when making plans related to charitable contributions.
"What we're telling clients is they need to — just like they look at a market cycle for investing — they need to look at a tax market cycle of three to five years, and then … optimize your income tax planning over that period of time, because so many things now are interconnected in this new tax law," Parthemer said.
Advisors should work with clients to "measure twice and cut once," he added, by checking what will happen in terms of a donor-advised fund's investments as well as ultimate distributions to charities.
"Thoughtful, careful planning can really fulfill the legacy that the clients want to establish, and it just needs to be done in a very sophisticated manner," he said.
Donating to private foundations as an alternative
Many DAFs support local, national or international philanthropy, though sponsor rules vary. However, donor-advised funds can't be used for grants given directly to individuals, and some sponsors restrict international giving.
If a client is interested in those options,
"You have to start with: What are your goals?" Searing said about discussing options with clients. "What are you trying to accomplish? … The geography of it and the purpose? For lots and lots of donors, donor-advised funds are a great tool. And there's no minimum distribution requirement yet."
