12 Questions to Ask When Selecting a Donor Advised Fund
Submitted by American Endowment Foundation on August 8th, 2016This article originally appeared in Advisor Perspectives, July 26, 2016
By Ken Nopar
With nearly 250,000 donor advised fund (DAF) accounts in the U.S., there are numerous sponsors from which to choose: commercial ones like Fidelity Charitable and Schwab Charitable, independent sponsors like American Endowment Foundation (AEF) and single-issue charity sponsors at religious organizations, universities and community foundations. There are approximately three times more DAF accounts than private foundations.
Because each DAF sponsor is different, it is critical that wealth, legal and tax advisors understand what their clients want to achieve with their charitable giving, whether they want to donate during their lifetimes and/or after their deaths, who will be involved and whether the clients want their advisors to be able to manage the assets in their DAF accounts. Only then can they help select the most appropriate sponsor.
Just like advisors evaluate different investment options for clients, they must also evaluate DAF sponsors to be sure that there is an ideal fit. Questions to ask while investigating different options include:
- Which types of grant recommendations will the DAF sponsor approve or not approve? While some DAFs will approve grants to nearly all 501(c)3 organizations, regional DAF sponsors may not approve grants outside of the local geographic area. Others may not approve grants to organizations that are not related to the mission of the DAF sponsor, and some cannot approve grants to charities based in other countries.
- Which types of assets can the DAF sponsor accept? Most will accept donations of publicly traded stock, while others may or may not accept contributions of more complex assets such as privately-held C or S corporation stock, LP or LLC interests, real estate, private equity or insurance. Be sure to check whether there are minimum sizes for these illiquid donations, as clients who want to donate a primary residence valued at $750,000 or vacation home at $400,000 will not be pleased to discover that a DAF has a $1,000,000 minimum requirement for real estate donations.
- Can the donor’s financial advisor manage the assets and at what amount? Only a few DAF sponsors including AEF permit advisors to manage at any amount, while others only allow this at $250,000 (Fidelity and Schwab) or $1,000,000 minimums, and some do not allow this at all. Some DAF sponsors only offer very few pooled investment options, while other DAF sponsors allow advisors to manage the assets similar to the way they manage their clients’ other assets.
- Is the DAF account portable or transferrable to another DAF sponsor? This is relevant should an advisor switch custodians or firms or if a client needs or wants to change DAF sponsors.
- Can the account continue in perpetuity? Many donors want their accounts to continue after their deaths and want to be able to name successor advisors, be they children, other family members, friends or advisors.
- What are the fee and timing details donors should know? Advisors should understand the fees for different size accounts (especially since many accounts will grow over time). They should also know the minimum amount required to open an account and minimum size of the grants, whether grants can be made online and scheduled in advance, the amount of time it takes to process and approve grant requests and the time required to establish an account (especially if there is a year-end request).
- Can the donor determine when and how much to grant? Some endowed DAFs only allow donors to grant a certain percentage of the assets from their account each year.
- Does the DAF sponsor require a certain percentage of the grant amounts to be distributed to its own endowment? Some single-issue charities, including some universities, require that they receive a percentage of all grant amounts.
- Are advisors able to, and why should they, utilize an alternative DAF if their firm offers their own DAF? Some firms’ own DAF offerings are more costly, investment options may be more limited, minimums to manage assets may be higher, service may not be efficient, illiquid assets may not be accepted, account may not be portable or the DAF offering may be relatively new, small and untested.
- Who are primary contacts for donors and advisors? Should they need help, many donors and advisors desire personal service and want to be able to work with the same contacts at their DAF sponsor over time. Advisors should understand whether this is possible at all levels or if there is a minimum asset requirement.
- What content and resources are available for donors and advisors? Determine how DAF sponsors help educate advisors about charitable giving. Advisors should know if DAF sponsors can help donors or have programs to refer them to philanthropic advisory firms.
- What happens to an account at death of fund creator? Clients may wish to continue the account after death or may desire to distribute remaining assets to other charities and to close the account. Some may be content to allow remaining assets to roll over into the sponsoring charity’s endowment. It is critical before opening the account that advisors and their clients are aware of the options since this may help determine where to open an account.
Setting up a DAF account should be a simple process for advisors and clients and should enable both to benefit. It is an opportunity for advisors to manage additional assets as well as deepen client relationships. Since over 95% of HNW clients are philanthropic, a DAF account can help many of these clients more efficiently achieve their charitable goals.
The key in making this a positive experience for everyone is to initially select the DAF that meets the common goals of client and advisor. This is true whether the client is establishing their first charitable vehicle, closing their private foundation and opening a DAF instead, or continuing to operate their private foundation and opening a DAF to complement the private foundation.
At American Endowment Foundation, we look forward to helping you through the 12 questions and deciding the best choice for you. Contact us or call at 1-888-660-4508; we look forward to helping.