While the end of the year is undeniably the most active time for opening and contributing to a donor-advised fund (DAF), this can be limiting when it comes to offering the best tax-smart strategies for clients. Using DAFs only late in the year means clients might miss opportunities, fail to fully consider their options, or rush into decisions that should be given more time.
That’s why it’s important for advisors to have conversations about DAFs with clients much earlier in the year. The process will be smoother, the considerations more reasoned, and the timeline more reasonable.
To get the conversation started, we recommend that advisors point out the following considerations with clients for mid-year DAF planning.
Taxes are top-of-mind
April 15 puts taxes on everyone’s mind, even clients who routinely file extensions, clients who make quarterly payments, and clients who simply don’t worry much about taxes.
So, leverage this time of the year as an opportunity to have conversations about what worked or didn’t work with last year’s taxes. Certainly, there’s no time machine to go back and change anything, but advisors and clients can learn from the past and lay the foundation for better outcomes next tax season. Here are three questions advisors can help clients consider.
- Could I have been more efficient? Perhaps last year’s tax bill feels too large. A charitable deduction, or a larger charitable deduction, can offer a solution. Starting the process of creating and funding a DAF now means it’s ready to capture charitable deductions for the year. Plus, once it’s in place, it can receive contributions at any time and allow clients to decide what to do with the charitable dollars without rushing.
- Could I have been more impactful? A review of last year’s giving can help clients identify missed opportunities for making a difference for the causes and organizations they care about most. At the same time, a review of tax filings may reveal a greater capacity for giving, which means a greater opportunity for impact.
- Is my tax situation changing? While much of tax season is about looking to the past, it’s also an opportunity to plan for the year ahead. Is a client expecting to receive a larger income? Sell a business? Have a child? Retire? Now is the time to prepare for the life events that will affect this year’s taxes, and to consider how charitable planning can be a part of the equation.
The good news is that, in addition to helping clients prepare to engage in charitable giving more efficiently and effectively, this conversation could help advisors and their clients address more holistic wealth and tax considerations.
The M&A market is heating up
No one needs to tell advisors that M&A activity is cyclical, or that it’s been especially volatile in recent years. But clients might not be following M&A as closely or monitoring its ups and downs. Help them see the big picture by talking through recent history:
- In 2021, low interest rates and a reopening after the pandemic caused M&A activity to spike.
- During 2022 and ’23, interest rate hikes and recession fears drove down M&A volume.
- These days, as the Fed hints at no rate hikes in the near future, experts believe the M&A market will take off once again and make up for lost time.
With all of this going on in the marketplace, the odds are good that some of your clients are or soon will be going through business transitions, and they probably are wondering how they will deal with the tax impact of a deal. This gives you an opportunity to be a great resource as you can talk with clients about how contributing shares of business interests to a DAF in conjunction with or prior to a sale to soften their income tax liability, relieve capital gains tax burdens, and fund charitable giving for years to come. Most important, you can help them see that having this conversation now – rather than waiting until the M&A pace quickens – will allow ample time for completing charitable contributions before acquisitions take place and, therefore, making the most of the opportunity.
Crypto is hot again
As of this writing, Bitcoin has risen by more than 60% YTD. Ethereum is up 55%. And, based on a recent crypto.com report showing there are more than 500 million crypto owners around the world, it’s likely that some of your clients are riding the crypto wave. If so, they might have an appetite for shedding some crypto wealth while the price is right.
What they might not be thinking is that this could be the best time ever for making crypto donations. Why? Look at the numbers: A crypto investor who has held Bitcoin for five years has seen it grow by 1,300%. However, that 1,300% was not a straight line up the mountain. It’s been a wild, up-and-down ride. Remember back in 2022, when Bitcoin had lost 70% of its 2020 value? Now it’s gained all of that back, and then some.
That means clients likely will need to offset capital gains and wealth appreciation. Intermediaries such as The Giving Block or Engiven can help, allowing clients to donate crypto to a DAF and have it converted immediately to U.S. dollars without requiring a financial institution to touch it. Once in a DAF, the proceeds are reinvested by the advisor’s team, and the client is off the hook for capital gains tax on the growth.
Preparing > procrastinating
Much of the annual Q4 stress can be avoided by not waiting until the end of the year to address things that could have been addressed earlier. So, suggest to clients that they can get ahead of the game by not waiting until Q4 to begin the process of creating and funding a DAF.
Urge them to consider how starting the process now will make it feel more thoughtful and less calendar-driven, and that they don’t have to wait until the end of the year to think about charitable giving. If they’re not sure how much they will want to put in a DAF this year, encourage them to make a relatively modest contribution to open the DAF now and wait until closer to year’s end, when tax planning is more predictable, to make a larger contribution. After all, once the DAF is in place, contributing to it is easy and can be done multiple times a year.
And if these arguments don’t spark clients into action right away, don’t despair. At least they’ll have thought about DAFs and will be more mentally prepared to pull the trigger when the topic is revisited in the months ahead.
A holistic connection
In addition to these four timely reasons for discussing a DAF now, another timeless one is to let them know that their advisor thinks about them holistically, cares about what’s important to them, and is interested in a long-term wealth-advisory partnership rather than a transaction-focused relationship.
If you’d like to learn more about helping your clients put DAFs to work for their charitable giving goals, talk to our experts at Ren.
