As a trusted financial advisor, you are uniquely positioned to help clients successfully navigate the complexities of wealth management and inheritance planning. One tool that remains underutilized by many advisors is the Donor Advised Fund (DAF). Beyond its immediate tax advantages and philanthropic benefits, a DAF can be instrumental in helping clients prepare the next generations to manage and steward inherited wealth responsibly.
Your understanding and familiarity with DAFs, and the potential they offer, greatly enhances the value you offer to clients while earning the loyalty of the next generations. It’s a win/win situation!
The Challenge of Wealth Transition and Client Retention
The proverb “shirtsleeves to shirtsleeves in three generations” starkly illustrates the challenges of wealth preservation across generations.
Studies indicate:
- 70% of family wealth is lost passing down to the second generation.-and –
- Cumulatively 90% of that wealth is lost passing down to the third generation.
This rapid dissipation of wealth is often due to a lack of preparedness among heirs and insufficient financial stewardship skills.
Additionally, intergenerational wealth transfer presents a threat, of sorts, to you as your clients’ financial advisor. Research shows that in 84% of wealth transfer scenarios, the assets leave the management of the client’s financial advisor and go to the financial advisor of the heirs. DAFs give you powerful solutions to reverse the threat of client attrition, while also helping clients better prepare the heirs to responsibly manage their inherited wealth.
The Power of a Donor Advised Fund
A Donor Advised Fund offers a structured and impactful way to involve heirs in charitable giving and financial management, thereby addressing some of the key issues that lead to wealth dissipation and client attrition. Here’s how DAFs can act as a game-changer:
1. Educational Opportunity
Managing a DAF provides younger family members with practical experience in financial stewardship. This includes:
- Investment Management: Heirs learn to manage investments within the DAF, understanding market dynamics and risk management.
- Budgeting and Allocation: Heirs gain skills in budgeting by deciding how much to allocate to different charitable causes over time.
- Evaluating Impact: Heirs assess the impact of their charitable grantmaking, teaching them to make informed, strategic decisions concerning their family legacy.
2. Instilling Philanthropic Values
DAFs foster a culture of philanthropy and responsibility, ensuring inherited wealth is used for positive societal impact. By involving heirs in the process of selecting and supporting charitable causes, they learn the value of giving back and become more conscientious stewards of their family’s philanthropic wealth.
3. Preserving the Estate
In addition to being cost effective, your clients will appreciate that DAFs are “tax smart”:
- They will enjoy an immediate and maximum income tax deduction.
- They will avoid capital gains and estate taxes.
- The assets in their DAF grow tax free.
Thus, the overall value of the DAF can increase, providing more resources for their family’s philanthropic wealth.
4. Promoting Family Unity
Managing a DAF encourages regular family meetings and discussions about charitable giving. This promotes open communication and strengthens family bonds. It ensures that all family members are part of the conversation about the family’s philanthropic goals and values.
5. Heirs Remain with You as the Original Financial Advisor
Since you’re already working with the heirs on the DAF (often from a very young age) – you are earning their loyalty and will remain with them after the passing of your clients. As a result, you will continue to manage the financial (balance sheet) assets they inherit as well as the charitable philanthropic DAF assets for which the heirs now act as successor advisors.
Practical Implementation for Financial Advisors
Integrating DAFs into estate planning requires a thoughtful approach. Here are practical steps to consider:
- Introduce the Concept: Educate clients about the immediate tax benefits of DAFs, highlighting both the philanthropic impact and the educational opportunities for heirs.
- Customize the Strategy: Tailor the DAF strategy to fit the client’s specific financial situation and philanthropic goals. This includes selecting investment options within the DAF and determining the timing and amounts of contributions.
- Facilitate Family Involvement: Encourage clients to involve their children and grandchildren in the management of the DAF. This can include setting up regular family meetings to discuss charitable goals and decisions.
- Monitor and Review: Continuously monitor the performance of the DAF and review the family’s philanthropic strategy. Provide guidance on how to adapt to changing financial conditions and charitable needs.
Avoiding “Shirtsleeves to Shirtsleeves”
Statistics show that without proper planning and education, wealth is often squandered within a few generations. DAFs help combat this trend by:
- Providing Structured Stewardship: The structured environment of a DAF requires thoughtful management and oversight, instilling discipline in younger generations.
- Encouraging Long-Term Thinking: DAFs promote a long-term perspective on both investment growth and charitable impact, aligning heirs with the family’s broader financial goals.
- Building Financial Acumen: Active involvement in managing a DAF enhances financial literacy and investment acumen among heirs, preparing them to handle larger inheritances competently.
A Mutually Beneficial and Powerful Solution
Donor Advised Funds represent a powerful tool for helping you and your clients prepare the next generation for significant wealth inheritance. By fostering financial literacy, instilling philanthropic values, and promoting family unity through a DAF, you will help ensure that wealth is preserved and managed responsibly across generations.
For you, incorporating DAFs into estate planning not only enhances the service provided to clients, but also contributes to breaking the cycle of “shirtsleeves to shirtsleeves.” Understanding and leveraging the benefits of DAFs can transform the way families approach wealth stewardship, ensuring a lasting legacy for future generations.
For a complimentary guide, authored by Phil Tobin, iGiftFund Founder/Chairman, the foremost authority on DAFs, click here: The One Page Legacy Plan.
The One Page Legacy Plan complements financial, accounting and legal expertise,bringing a value-added philanthropic dimension to the relationship with your client and the client’s next generations, who will manage inherited wealth.
This is Part 1 of a 3-part series on The Great Wealth Transfer, elaborating on the benefits of Donor Advised Funds to financial advisors and their clients.
Follow this link to read Part 2.
Follow this link to read Part 3.
A Note from iGiftFund Founder and Chairman, Phil Tobin:
I am happy, as is the iGiftFund team, to answer questions and discuss ways to use DAFs in your practice to mutually benefit both you and your clients.
iGiftFund prides itself on the same personal relationships that financial advisors value with their clients. In that spirit, iGiftFund does not operate a call center. When you call iGiftFund, rest assured a real person will take your call and answer your questions, or direct you to an iGiftFund principal, representing the longest DAF experience in the industry. Additionally, your clients will appreciate knowing that they will save 25 to 30%, or more, in administrative fees vs. fees of the large national DAF sponsors.
If you are a financial advisor wanting to learn more about Donor Advised Funds and iGiftFund, please feel free to contact us at your convenience.
800-800-0366
Phil Tobin
Founder/Chairman
iGiftFund