The Loch Ness Monster, Big Foot, and a lawyer walk into a bar...
Of course, this joke has no punch line as the monsters I mentioned don’t exist. They are merely myths.
As a young boy, I was fascinated by books about myths. The most intriguing myth for me was the Bermuda Triangle. The more I read, the more it became apparent that the Bermuda Triangle is a myth.
Today, I read about the myth of Donor Advised Funds (DAFs). Some financial advisors tell their clients about the wonders of DAFs. While DAFs can be useful and do have their place, they are an imperfect charitable giving tool.
Most financial advisors tell their clients DAFs are suitable for funding with just a few dollars, which is perfectly accurate. However, the myth starts when some of those advisors spin tales of the wisdom about funding a DAF with large charitable gifts. The average DAF has about $250,000 in it for a reason. That level of DAF funding is reasonable. DAFs are great for cumulative charitable gifts of less than $1 million.
Some financial advisors recommend that donors transfer millions to DAFs. The effect of that advice is to turn the keys to the wealth over to the advisor’s employer, with increased operating costs to the donor.
That’s why the IRS tax deduction letter sent to a DAF donor has these impactful words in it: The institution that created the DAF account "has exclusive legal control over the assets contributed." Wow!
The words "donor advised" literally mean what they say – the donor becomes merely an advisor to the company that now controls the DAF. Let that sink in for a moment, and the rationale for the charitable giving advice may become clear.
The beefy alternative to a DAF is a private family foundation (PF). Some proponents of large DAFs will tell stories that PFs are expensive and complicated. They conjure fear that donors will be bombarded by unsolicited requests from charities as far away as Loch Ness. Those concerns are largely overblown.
Counterintuitively, a DAF can actually be the more costly charitable planning tool for larger charitable giving. From an expense perspective, a $5 million DAF can cost $20,000 annually just to have the account – plus investment management fees. That cost is materially more than a custom PF controlled by family.
Ignore the myth of DAFs for charitable gifting if the gifts will ultimately exceed $1 million. Instead, consider creating a PF for cumulative charitable gifts over $1 million. The donor and the donor’s family keep control, enjoy lower operating costs, and have more fun.