How to Manage a Donor-Advised Fund (DAF) as an Advisor

When wealthy investors with a philanthropic bent are interested in creating a financial legacy for a worthy cause, they may consider contributing to a donor-advised fund (DAF). A donor-advisor fund is an investment fund or account managed by a 501(c)(3) organization that exists specifically for charitable giving. Investors who contribute to donor-advised funds can hand over their management to their advisors. If you work with high-net-worth clients, it’s important to know what’s required to manage a DAF.

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What Is a Donor-Advised Fund?

A donor-advised fund is a separate investment account established through a public charity. The charity organization sponsors the DAF and manages individual investor accounts within the fund.

When someone contributes to a donor-advised fund, they receive an immediate tax deduction. Contributions can be made in cash, real estate, stocks or other assets, and are permanent once completed.

Donors may contribute additional funds at any time and invested amounts grow tax-free. They have the opportunity to make recommendations about how their contributions should be used, and when grants should be made to their preferred charities.

The benefits of donor-advised funds for investors are twofold: They get a tax deduction for the money they contribute, and the reassurance of knowing that their wealth is being used to support causes that matter most to them.

Financial Advisor’s Role in Managing a Donor-Advised Fund

Donor-advised fund sponsoring organizations can and do allow donors to elect to have their advisors manage their DAF accounts. Advisors may be given full or partial access to the account, according to the needs and preferences of their clients.

Depending on the level of access granted, advisors may:

Make donations on behalf of their clients
Recommend grants to specific charities, following the client’s wishes
Engage in active management of assets held in the client’s DAF account to drive growth

Donors get the benefit of the advisor’s expertise, and they don’t have to worry about the day-to-day management of what’s happening in their DAF account. They can work with their advisor to create a plan for giving through donor-advised funds and authorize their advisors to execute the plan, leaving them free to focus on other things.

What Do You Need to Manage a DAF as an Advisor?

What you’ll need to manage a DAF on behalf of your clients can depend on whether they already have a donor-advised fund account. Let’s assume that they do not yet have a DAF account established.

You would need to:

Choose a DAF provider. Several organizations offer donor-advised funds. If you’re a registered investment advisor, you might first check with your RIA custodian to see if this service is available.
Complete the paperwork. There are several documents you’ll need to submit to establish a DAF account on behalf of your client, including a donor-advised fund agreement and an investment recommendation form. Once you’ve done the initial paperwork, you’ll complete additional paperwork to set up your client’s investment account.
Make an initial contribution. Once your client’s DAF account is established, you can arrange for their first contribution. You’ll consult with your client to decide which assets to transfer to their DAF account and the transfer amount.

It’s not unusual for DAF providers to require a minimum initial investment. For example, your client may need to contribute a minimum of $10,000 to $100,000 to start. Take note of whether your client is required to contribute a certain amount to allow you to manage their account through your investment platform versus the sponsoring organization’s.

If your client already has a donor-advised fund account with a sponsoring organization, you can skip most of the steps above. You will, however, need to direct your client to grant you access to their account.

Again, this access can be full or partial. Talking with your client about their needs and expectations can help you agree on which level of control they feel most comfortable with.

How to Manage a Donor-Advised Fund as an Advisor

Once you’ve gained access to a client’s DAF account, you can begin incorporating it into their broader financial plan. How you manage a donor-advised fund on behalf of your client can depend on their risk tolerance, objectives and time horizon for giving.

Here are some tips for helping your clients make the most of their DAF accounts:

Sit down with your clients for a detailed chat about which charitable causes they’d most like to support and what their overall goals are for giving.
Talk to them about how frequently they anticipate making contributions to their DAF and whether they have any preferences about when grants are made from their account.
Invest for growth, within the limits of the client’s risk tolerance, to generate more capital for charitable giving.
Consider creating a legacy plan that names one or more successors or charitable beneficiaries, so your client’s giving plan can continue after they’re gone.
Leverage tax management strategies within the client’s DAF account, such as contributing depreciated assets to offset capital gains tax.
Rebalance the client’s portfolio periodically to direct appreciated assets into their DAF account, which is another opportunity to offset capital gains.
Discuss with the client whether it makes sense to set up recurring automatic contributions monthly or quarterly, versus one large lump sum annually to maximize the benefits of compounding interest.
Make larger contributions in years when the client reports a higher income to help them qualify for a bigger tax deduction.

You may also want to coordinate your efforts with other members of the client’s financial planning team. If they have an estate planning attorney or accountant, for example, you may collaborate with those individuals to develop a giving plan that’s tax-efficient and still aligned with the client’s goals.

Helping Clients Navigate the Potential Pitfalls of DAFs

Although DAFs offer many advantages, potential challenges exist. Clients may face limitations on the types of grants they can recommend, and sponsoring organizations often impose minimum contribution and distribution amounts. Advisors should be transparent about these limitations and how they might impact the client’s charitable strategy.

Advisors should also be aware of potential delays in grant processing. Some sponsoring organizations have slower approval timelines, which may affect clients looking to distribute funds promptly. Setting expectations around these timelines can help manage client satisfaction.

Another issue is the risk of “warehousing” funds, where clients contribute assets to a DAF but delay or minimize grant-making. This practice can attract scrutiny from regulatory bodies and may undermine the philanthropic purpose of the DAF. Advisors may want to encourage consistent grant activity to avoid these concerns.

Additionally, clients must understand that once assets are contributed to a DAF, they cannot be reclaimed. Advisors should discuss the irrevocable nature of these contributions to avoid misunderstandings.

Clients should also be cautious about self-dealing. While DAFs offer flexibility, grants cannot be used to fulfill personal pledges, benefit the donor or their family members, or provide quid pro quo benefits. Violating these rules can result in penalties and tax consequences.

Record-Keeping and Reporting

While DAFs reduce the administrative burden compared to private foundations, record-keeping is still necessary. Advisors can help clients keep track of contributions, grants, and investment performance. Most sponsoring organizations provide regular statements, but advisors may need to compile comprehensive reports for clients’ overall financial plans.

Reporting is particularly relevant during tax season and for estate planning purposes. Advisors should also review any updates in charitable regulations that may impact DAF activity.

Frequently Asked Questions (FAQs)

Who Has Control of a Donor-Advised Fund?

Sponsoring organizations oversee and manage donor-advised funds. Individual investors may have their financial advisors manage their DAF accounts on their behalf. Sponsors have the right to approve or reject a donor’s recommendation to have their account managed by their advisor.

How Long Does Money Stay in a Donor-Advised Fund?

Contributions your client makes to their donor-advised fund account can remain in the account indefinitely until they’re ready to make a grant to a qualifying charity. Allowing funds to remain in the account means they can continue to grow tax-free until they need to be used to support your client’s preferred charities.

What Are the Risks of Donor-Advised Funds?

Donor-advised funds do have some potential drawbacks. Contributions are irrevocable, meaning clients can’t change their minds once they’ve transferred assets to their DAF accounts. While the client can make recommendations about having you manage their accounts or how they want their contributions to be granted, the sponsoring organization retains ultimate control. Market downturns can also threaten the growth of their invested contributions.

Bottom Line

An investor reviews what you need to manage a DAF.

Donor-advised funds are a tax-advantaged vehicle for making charitable contributions, and they’re something you might encounter if you work with wealthy clients. And if you’re interested in attracting more high-net-worth clients, understanding what’s required to manage a DAF could work to your advantage.

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Donor-advised funds are just one way that clients may contribute to worthy causes. They may also consider establishing a charitable foundation or setting up a charitable trust as part of their estate plan. Talking with your clients about their preferred vision for giving can help you determine which option might be best suited to support their philanthropic goals.