One of my clients — I’ll call him Jonathan — came to me recently with concerns about his estate planning. Jonathan was a successful corporate manager who received a big payday when a major firm acquired the company he worked for. With no children of his own, he’d arranged for most of his wealth to be divided between two favorite charities: a local boys club and an organization that helped homeless people train for work and find jobs. Life had been good to Jonathan, and he wanted to give back.
But recently, there had been some management changes at the homeless support agency, and Jonathan was no longer confident that his gift would be well used. He was thinking about removing them from his trust.
We suggested something that sounded to him like a bold plan, but was really quite simple. Amend your trust, we told him, so that upon your death your funds go to a donor-advised fund — a type of investment that manages contributions made by individual donors.
Jonathan knew what a DAF was. He was already using one for his annual charitable giving because it let him donate appreciated securities, thus maximizing his annual tax deduction. Like many people, however, he’d never thought about donating all his wealth to a DAF after his death. He was under the impression that a donor needed to be alive to advise the fund.
Not so. Jonathan just needed to establish clear rules on who the future adviser or advisory team would be and how he would want them to honor his philanthropic wishes. With a DAF, he could arrange for a lasting legacy of continued giving beyond his own life. Another plus: Because no organization’s name is written into trust documents, changing your mind about what charities to give to is quick and simple. With a trust, changing a charitable beneficiary often requires a trip to your lawyer.
People tend to think that leaving an ongoing charitable legacy is exclusively for uber-wealthy people such as Bill and Melinda Gates, whose foundation gave away $3.6 billion in 2013. While there is no defined level under which a foundation is “too small,” Foundation Source, the largest provider of foundation services in the US, serves only foundations with assets of $250,000 and up. While foundations offer trustees greater control over investing and distribution of gifts, they are costly to set up and run, and have strict compliance rules.
DAFs offer an alternative. Their simplicity, relatively low cost, and built-in advisory board make them an ideal instrument for securing a financial legacy. Unlike foundations, there is no cost to set them up. And the tax advantages are better. The IRS allows greater tax deduction for gifts of cash, stock, or property to a DAF, compared with a foundation. Foundations have to give away 5% of their assets annually, but there are no distribution requirements for DAFs.
All DAFs have a board of directors as part of their structure. Many of them are willing to maintain the gifting goals of a donor after their death and insure that the recipient charities are eligible for the grants each year. At my firm, we have been asked to serve as part of clients' DAF’s adviser team, to which we have agreed. Upon Jonathan’s death, we will continue to monitor his charitable recipients for quality of services, efficiency, and results — all very important goals of Jonathan’s.
You have many options to choose from. DAFs come in many shapes and sizes, from local community foundations to national organizations. Most of the independent brokerage firms have their own funds, with minimum initial contributions as low as $5,000.
With a little research, a family should be able to find a suitable home for their estate and leave a lasting legacy — whether they are rich, Bill-Gates-rich, or not wealthy at all. To learn about finding the DAF that fits you or your loved one’s vision and values, one way to get started is to check out the community foundation locator at the Council on Foundations.
Scott Leonard, CFP, is the owner of Navigoe, a registered investment adviser with offices in Nevada and California. Author of The Liberated CEO, published by Wiley in 2014, Leonard was able to run his business, originally established in 1996, while taking his family on a two-year sailing trip from Florida to New Caledonia in the south Pacific Ocean. He is a speaker on investment and wealth management issues.