How Placeholder Funds Saved Advisors and Their Clients at Year-End
Submitted by American Endowment Foundation on January 20th, 2020By Ken Nopar, Senior Philanthropic Advisor
Though advisors regularly encourage their clients to open up donor advised funds (DAFs) throughout the year, invariably some clients wait and call them in the middle of December and say that they want to open a DAF and contribute stock or other assets. Sometimes it is too late.
Fortunately, AEF introduced placeholder funds a few years ago, and advisors are increasingly using them with donors. As a reminder, placeholder funds, which some refer to as shell funds, are a way for advisors and their clients to submit the completed donor advised fund application to AEF ahead of time, and then when the clients decide (hopefully sooner than later!) to donate assets to their fund, the account is ready to go without delay.
Many advisors used these during the past year and especially in the months leading up to November and December. Previously, advisors would have to scramble and rush to complete the application and make sure that the donors signed the DAF application and donated to AEF in time. Of the new AEF DAF accounts established in 2019, over 20% initially began life as placeholder funds.
There is no charge to establish these, so as a result, if an advisor and client agree that a DAF is a good idea but the client is not sure how much or which asset to donate, they complete the application, mark it is a placeholder fund, and it remains ready to be funded. If the clients change their mind, or if they don’t get their expected bonus, or if the price of the stock they want to donate drops and they want to wait until it rises again, they are not required to make the donation and there is never a charge.
Some clients and their advisors have been setting up placeholder funds when they are waiting for the optimal day or target price to donate a particular asset, since any delay in sending in the DAF application may result in a smaller contribution and deduction.
These proved to be very helpful in the last few months of 2018 when the markets dropped significantly. Those who had previously created but not yet funded placeholder funds were able to very quickly donate assets without having to first wait to submit the application and fill out the paperwork. Markets are now at an all time high and there is some uncertainty about the direction of the markets, so placeholder funds could again be advantageous to donors and their advisors this year.
If clients indicate that they may open a DAF account in a year or two, a placeholder fund is probably not appropriate, but if the funding will take place in the next several months, then this can save much time and frustration later. Since there is no charge to open them, and the online application process is easy for both advisors and clients, this proves to be another win-win for everyone involved. Please note that the placeholder fund is not to be confused with the legacy fund which is to be funded at the death of the donor.
Both of these DAF funds are designed to help advisors, their clients, and the charities that the clients want to support.
At American Endowment Foundation, we look forward to helping donors and advisors determine the best strategies for their charitable giving. Please contact us or call at 1-888-966-8170 with any questions.