Charitable giving is a popular and long-standing tradition in the U.S. While plenty of Americans contribute to organizations of their choosing, many people leave much of their donating until the last minute. From a fiscal standpoint, this can limit the potential tax savings of this act, and prevent clients from realizing the full potential of their generosity.

Instead of waiting until the end of the year for charitable giving, it is better to develop a long-term and comprehensive plan. This can not only streamline the process, but it will also ensure that the maximum tax benefits are realized along the way. There are a number of effective strategies in this regard, but one in particular - donor-advised funds - are growing more popular in today's philanthropic environment.

As a financial advisor, you may want to highlight the benefits of donor-advised funds for your clients. Here is what you need to know about this specific charitable giving vehicle:

What are donor-advised funds?
A donor-advised fund, or DAF, is a type of fund created by the charitable organization, but designed with the donor in mind. When utilizing a DAF, donors can contribute to this fund and earn a tax benefit instantly in return. While the 501(c)(3) organization is the sponsor, the donor retains advisory control over the gift and can recommend grants as he or she sees fit.

As a result, the DAF acts as a long-standing charitable giving vehicle that can have funds deposited over and over again. The initial tax break is substantial, and while that is a positive, future contributions do not receive any favorable tax status. However, any subsequent gains on the donation are not taxed by the Internal Revenue Service.

Donor-advised funds rise in popularity
The benefits of using a DAF for charitable giving has helped spur its popularity among the philanthropic community. A recent report from the Chronicle of Philanthropy has found that several of the nation's most successful charitable organizations sponsor donor-advised funds, as reported by SFGate.

Since donors can put cash, stocks or other assets into their DAF and earn that immediate tax benefit, using this vehicle is one of the easiest giving methods around today. From a charitable organization's perspective, the DAF allows them to have control over those donations for a longer period of time, all while showing potential donors that there is an easy and tax-favorable method to give.

However, this same positive can also be considered a negative. Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy, explained that donor-advised funds can sometimes increase the amount of time between the donation itself and when the charities actually receive the funds, according to the media outlet. Even so, some of the most profitable charities operate DAFs, including Fidelity Charitable, Schwab Charitable and the Silicon Valley Community Foundation.

Pros of donor-advised funds
Should you approach the subject of donor-advised funds with your clients, it can help to outline the positives of this philanthropic vehicle. In an article for Financial Advisor magazine, Mark Mersman detailed several of the benefits of this strategy.

These include:

1. Improved tax position
A DAF is a versatile and useful tool from a tax perspective. In the most traditional sense, donors can simply cut a check to their charity of choice and be on their way. With this type of fund, they instead can transfer stocks or other assets into the account. That increases the liquidity of their donation, plus they'll receive an immediate tax deduction for the value of their donation. In broad terms, a DAF allows clients to donate more money over a period of time while simultaneously placing them in a more favorable tax position.

2. Relaxed tax season
Clients that are heavily invested in charitable giving will likely have a fairly hectic tax season, as they track down all related documents to their yearly contributions. With a DAF, they will have a much simpler time as the deadline nears. Deductions with a DAF are dealt with at the beginning, so much of the hard work is already taken care of when it is time to file.

3. Excited client base
Charitable giving can be a complicated, tedious process for clients. Using a DAF, they get simplicity and ease of use instead, and this can lead to excited people walking through your door. Consider how streamlined the DAF process is compared to other forms of giving. This can help your clients see the positives of this strategy, and it will show that you are willing to bring creative ideas to the table.

How to approach the subject of donor-advised funds
Your clients might not have given much thought to charitable giving, or they could be locked into their existing methods. Either way, the concept of a donor-advised fund may be foreign to them, and how you approach the subject can help shed some light on this tax-favorable vehicle.

In an article for Wealth Management, Kevin McKinley wrote that you can start this process by first identifying the right type of clients for DAFs. These often include donors who are in a higher tax bracket today than they will likely be in the future. This is because the tax break for their DAF will be immediate and substantial, helping them out instantly should they be nearing retirement or facing a large capital gain. A DAF will also be beneficial for clients who want to take part in a financial strategy that will incur high taxes, such as switching a retirement account to a Roth IRA. The significant deductions earned via a DAF can offset many of those costs.

Once you have the right clients identified, you can approach the subject of a donor-advised fund. McKinley explained that it helps to crunch the numbers with your clients. Should they already make charitable donations, look at their previous deductions. Use the amounts and run a scenario where they donated the same money using a DAF. Show them their current tax savings and their potential savings when opting for this strategy.

Charitable giving and donor-advised funds are not for everybody. However, they can work for many clients, and keeping this option in mind can be a valuable tool in the repertoire of any financial advisor.

To learn more on this topic, register for our Cannon Trust I course or learn more about our other offerings at www.cannonfinancial.com.

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Sources/Resources: 
http://www.nptrust.org/what-is-a-donor-advised-fund/
http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Donor-Advised-Funds
http://www.sfgate.com/business/networth/article/These-days-a-lot-of-charity-begins-with-5835629.php
http://www.fa-mag.com/news/5-reasons-why-every-advisor-should-know-about-donor-advised-funds-11280.html
http://wealthmanagement.com/philanthropy/tax-advantages-donor-advised-funds

Disclaimer: The materials and information contained herein are intended for educational purposes, to stimulate thought and discussion so as to provide the reader with useful ideas in the area of wealth management planning.  These materials and information do not constitute and should not be considered to be tax, accounting, investment, or legal advice regarding the use of any particular wealth management, estate planning, or other technique, device, or suggestion, nor any of the legal, accounting, tax, or other consequences associated with them. 
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