By Sarah Libbey
Charitable planning may already be a strategic plank in the wealth management platforms you create for clients. For some, it may be an integral part of a tax-planning strategy; for others, a means to establish a lasting legacy. But it is likely that clients who make charitable giving a part of their financial plan do so because they hold strong beliefs in the social missions their gifts are meant to support. They give because they wish to make a difference - and you, as a trusted advisor, stand in a unique position to help them maximize the impact of their charity.
Cash and publicly traded securities typically make up the majority of assets contributed to charities, be they public charities or private foundations. Many donors opt for public charities with donor-advised fund programs as the preferred vehicle because of their potentially higher level of tax deductibility versus private foundations. But there is also a class of donors that may have financial assets that are non-publicly traded, such as certain real estate, private C-Corp or S-Corp stock, or certain limited partnership interests, among other more esoteric assets - which they may want to put in a philanthropic program.
As one might expect, the process of contributing these "special" assets is somewhat more complex than the gifting of cash or publicly-traded securities. But with a few of the larger donor-advised programs in the charitable community, it is possible to contribute these non-publicly traded assets directly to the charity, with the proceeds from their sale allocated to the donor's DAF account. This raises the need to liquidate the assets beforehand and avoids the potential of triggering taxable events that could reduce the overall amount of the contribution. What's more, in many cases it's possible that contributions of these complex assets may also be deductible at their fair market value (as determined by a qualified appraiser), rather than at their cost basis. This would apply for the same asset being donated to a private foundation, meaning potentially larger grants to the DAF donor's recommended charities.
Furthermore, a single gift to a public charity with a DAF program can be granted to multiple charities as recommended by the donor. By contrast, giving directly to individual charities would require working separately with each, and many smaller charities either are not able to accept such donations or would only consider very large donations due to the administrative costs and burdens.
Once the donation of the special asset is complete, donors enjoy all of the advantages that DAF programs have to offer. They get the freedom to recommend grants to eligible IRS-qualified public charities, the flexibility to recommend those grants on a chosen timetable (subject to minimum grantmaking requirements), and the ability to recommend investment allocations for potential growth of their donor-advised fund account balance. This can result in potentially larger and/or more frequent grants to the charitable organizations that donors support.
DAFs also are extremely simple to establish, and they are easy to monitor and maintain. They provide a greatly simplified system of recordkeeping, with some public charities often providing a single annual statement of account activity, as well as required tax reporting documentation. This all occurs without sacrificing a donor's privacy, often at a lower cost than with other charitable giving vehicles.
Simplicity, cost-effectiveness and, above all, flexibility; these are the key elements of donor-advised funds. Members of the aging boomer generation - more and more of whom are likely to become your clients - are looking for strategies not only to preserve their wealth but to put it to work in ways that help them make a difference. For those clients whose financial situations and philanthropic inclinations align, donor-advised funds may be an important strategy for you to steer them toward and thus further their trust in you.
Sarah Libbey is president of Fidelity Charitable Gift Fund.
