“The whole idea is to set up a separate fund that will grow over time, and yes, you get the tax receipt for any gift that’s made to the fund. But there’s also the ability to amplify your giving over time by creating a tax-exempt fund that is 100% devoted to charitable purposes. And as we like to say in the industry, give it, grow it, grant it,” Sparks says. “Donor advised funds offer the ability to give more to charity overall, which really appeals to donors who want to take their giving to the next level. Instead of providing a credit card, you are able to be a bit more thoughtful and impacting with your giving because it is planned out.”
It’s that intersection of financial planning and philanthropic giving which Sparks believes makes DAFs such a powerful tool for advisors. She adds that these funds typically have a relatively low minimum asset requirement, though that will vary based on the institution these are set up through.
Advisors, Sparks says, will be able to find key moments to raise the prospect of DAFs as they watch their clients’ giving habits. When clients typically give cash or securities, advisors can talk about setting up a philanthropic structure like a DAF that aligns with client goals. Philanthropy can also arise in a standard values conversation as the advisor learns more about their client.
The DAF conversation can also come about during a significant liquidity event, like when an entrepreneur client sells their business. Sparks notes that these events can often generate a huge tax bill, and philanthropic giving may be a significant part of how the client plans to offset some of that bill while growing their giving impact. The trouble is, a moment like selling a business is often extremely busy and quite emotionally charged. Deciding exactly where to donate at that time can be challenging. Setting up a DAF, Sparks says, can mean the client triggers their tax receipt now while deferring the final donation decision.
While the client retains input in the use of their gifted funds, giving advice to their charity of choice, Sparks emphasizes that the charity has final decision over the use of the gift. Moreover, it’s important for clients and their prospective heirs to understand that once the money is gifted in a DAF, they can’t get it back. Sparks says that advisors and clients setting up a DAF need to discuss what happens to the fund after the clients pass away, whether legacy instructions will be left with the foundation or if a family member will be named the successor advisor to the fund.