When people put together estate plans, they’re typically looking to achieve a few simple objectives: They want to create clarity for the future, ensure their assets are distributed as they wish, reduce taxes on their estate, and identify charities or special causes that they would like to support with their wealth.
The problem is, many people avoid estate planning, feeling it’s not necessary (or at least not yet) or simply finding it too complex to understand.
One way to overcome these concerns is to include a donor-advised fund (DAF) in estate planning. The added bonus? Connecting your clients to a DAF for long-term planning delivers immediate benefits as well.
Explain the need
If you raise the issue of estate plans with many Americans, you’re likely to get a reaction along the lines of, “Why would I need an estate plan?” In fact, a study by Caring.com found that only about 32% of all Americans have an estate plan.
Why the low percentage? Some people assume they don’t have enough wealth to warrant planning. Others say they’ll get to it when they’re motivated by a major event, such as a serious illness, death of a loved one, family expansion or retirement. Others simply don’t see the point.
This attitude shifts, though, as people increase their wealth. For example, the Caring.com study found that, in 2023, only about 22% of people earning less than $40,000 a year have documented estate plans, but when income increases to $80,000 or more, the percentage increases to nearly 50%. Looking at it another way, a Raymond James study found that 84% of individuals with $500,000 or more in investable assets have completed estate plan documents.
Unfortunately, having a plan apparently doesn’t automatically deliver peace of mind. Among those who do have documented plans, only about one-third feel they are “extremely prepared” for the wealth distribution that will occur after their death, according to the Raymond James study.
So, your job as an advisor starts with education.
First, help your clients understand that, even if they have relatively modest incomes, an estate plan can pay dividends. With an estate plan they can:
- Ensure assets end up where they want them to. Help clients understand that, without clear direction, they leave decisions about the distribution of their assets to people and courts who might have little knowledge of the client’s desires. As a result, those making the decisions might not know (or be able to verify) that the client wanted to pass on wealth to heirs, benefit charities, support a specific cause, or do something else with their assets.
- Reduce or eliminate family strife that could result from a lack of clarity. Countless families have been irreparably shattered by squabbles over what a deceased intended for his or her assets.
- Reduce or eliminate the need for probate and related expenses. Probate costs vary from state to state and case to case, but they easily can consume as much as 3% to 8% of an estate’s value. Plus, probate can be a long and painful processes.
- Minimize taxes. Estate and inheritance taxes can gobble big chunks of an estate if measures are not taken to minimize their impact.
Make a DAF part of the plan
Certainly, your clients have plenty of tools at their disposal when creating estate plans, but, as part of a fully developed estate plan, a DAF can be particularly helpful because it can help to simplify things, address the challenges mentioned above, and start delivering benefits now rather than simply when your client passes away.
In simple terms, a DAF is created for your client by a sponsoring charity to allow funds to be granted to charities. Your client can donate to the DAF as frequently or seldom as desired – receiving a tax deduction in the year of the donation – and, while assets are no longer owned by your client, your client retains the opportunity to recommend how funds are granted out to nonprofits. This activity can involve family members, and that role can be passed on to heirs upon the client’s death.
Your role is pretty straightforward. You connect your client with a sponsoring charity (Ren provides one in the form of Renaissance Charitable Foundation), which then creates a DAF on the donor’s behalf. The donor decides how much to put into the DAF, from a few thousand dollars to millions, and which assets to use to fund the DAF. Assets in the DAF remain under your management, and the sponsoring charity is responsible for administering the DAF, including generating year-end tax documents.
Once the DAF is in place, it can deliver a range of benefits, and the client doesn’t have to wait until their death for those benefits to go to work.
Most notably, perhaps, as mentioned above, because the DAF is sponsored by a public charity, your client receives a charitable tax deduction any time funds are contributed to the DAF. If the client makes donations to the DAF in the form of appreciated assets, they can avoid capital gains taxes on that appreciation. In addition, assets donated to the DAF are removed from the estate, reducing tax liabilities and further clarifying estate planning objectives.
In addition, with the DAF, the client will have a simplified vehicle for charitable giving that can be used for the rest of their life, can help to support a family legacy of charitable giving and can ensure their giving continues into the future.
Plus, making a DAF the beneficiary of IRAs or pre-tax retirement accounts can further reduce taxes. If those IRAs or pre-tax retirement accounts pass to designated heirs, they will be subject to income in respect of decedent (IRD) taxes; however, if those assets pass to a DAF, the income tax is avoided. Plus, non-qualified assets that pass to individuals can receives a stepped-up cost basis, reducing the potential for capital gains upon the sale of the asset.
Furthermore, by making a DAF the beneficiary of these assets, the client can manage all charitable beneficiaries through one vehicle rather than naming and managing them on multiple IRAs, annuities, life insurance policies or other documents. Finally, the DAF creates an ongoing vehicle for supporting charities, rather than delivering one donation when the client dies.
Three results
So, let’s say your client has created an estate plan that includes a DAF. What will happen when that client passes away? One of three things:
- The DAF will stay in place, with the role of grant advisor passing to a successor grant advisor your client has designated, who can also contribute to the DAF and enjoy the tax-deductions.
- The DAF will be liquidated, with charitable beneficiaries recommended by your client receiving the proceeds in a lump sum.
- The DAF will be spent down, distributing grants like an endowment to the charities recommended by your client until it is depleted.
Your client can decide when the DAF is created which of these courses are to be taken, and can revise that decision at any time. Regardless of the avenue chosen, the client can be assured their philanthropic objectives are being achieved.
How it works: A case study
Larry Kirk has worked smart and hard. The result is that he has enjoyed a lot of success as a businessman and that has allowed him to, among many things, build a substantial retirement plan. As he approaches retirement age, the 62-year-old wants to create an estate plan that would maximize his retirement assets, provide an inheritance to his son, Neil, and also benefit his community.
In talking with his financial advisors, Larry decides to roll his retirement assets into an IRA that, upon his death, will go to a DAF.
Why take this route? If Larry bequeaths the IRA to Neil – who will receive other assets from the estate – then the IRA proceeds would potentially be subject to both estate and IRD taxes. However, by leaving the IRA to the DAF, it is not subject to the estate tax or the IRD tax, and the full proceeds can be used to fund grants to nonprofits valued by Larry and Neil.
Such arrangements can be designated with specific guidance. For example, based on Larry’s wishes, the DAF known as the Kirk Family Fund will automatically make annual 2%-of-value grants to local charities, and Neil will have the ability to recommend grants up to another 2% of the DAF’s value to qualified public charities he wants to support.
Larry is delighted because less of his estate will be consumed by taxes, his son will receive an inheritance, and Larry has the opportunity to make a generous gift to his community while also allowing Neil to support charities through grants of his choosing.*
In other words, Larry reaches immediate and long-term objectives with a vehicle that has simplified his life – which suggests that, if more people could learn about the benefits of DAFs for estate planning, a lot more people might have estate plans.
If you’d like to learn more about helping your clients include DAFs in their estate planning, talk to our experts at Ren.
*This example is hypothetical and for educational use only. The situations, tax rates or return numbers do not represent any actual clients or investments. There is no assurance that the rates depicted can or will be achieved. Actual results will vary. Please consult with legal and tax counsel about the suitability.
