A Donor-Advised Fund (DAF) is a charitable giving account administered by a public charity that allows individuals and families (donors) to contribute assets into, and then send gifts (grants) to qualified non-profit charities of their choosing. You could think about it as a holding pen for your charitable dollars. When someone creates a DAF, they get to determine what the name will be – most of the time, it will be a name that associates the DAF with its owner, ie: “The John and Jane Smith Charitable Fund”. And when they make grants to qualified charitable organizations, the receiving charity will either receive an electronic transfer of funds, or a physical check made out in the name of the DAF. These are the nuts and bolts of DAFs. Now let’s get into some of the added benefits and planning opportunities that come along with these charitable accounts.
DAFs accept a wide range of assets, including cash, publicly traded securities, and in many cases, more complex assets such as real estate, restricted stock, cryptocurrency, or privately held business interests. Donating appreciated assets can be particularly tax efficient because you generally receive a deduction for the fair market value of the asset while avoiding capital gains tax on any appreciation. For example, let’s say you invested $50,000 in company XYZ five years ago, and that asset is now worth $75,000. If you sell / liquidate that investment and make a cash gift to a charity, you will pay capital gains tax on the $25,000 of growth. However, if you contribute the $75,000 asset into a DAF, you will avoid paying any capital gains tax on the growth. In addition, you will get to claim the charitable gift as a deduction that tax year.
Because the Donor Advised Fund is in and of itself a charitable account administered by a public charity, all gifts made to a DAF are considered completed gifts. And because these are completed gifts to a 501(c)(3) charity, the contribution is eligible to be listed on Schedule A of your tax return as an itemized deduction (in the year it was made). If itemized deductions exceed the standard deduction for that year, the individual/family receives a tax benefit for their contribution in the form of a larger deduction from their taxable income, lowering their overall tax liability.
Once in the fund, contributions are irrevocable and must be used for charitable purposes; however, many Donor Advised Funds allow for the assets in the account to remain invested – either in the same asset that was contributed, or that asset can be sold and the dollars in the account can be invested differently. And since a DAF itself is a qualified charity, all the growth that happens within the Donor Advised Fund occurs tax-free. This investment feature allows donors to potentially expand their charitable impact over time because their DAF can be growing as they are making grants to charities they want to support. A note of caution though, if you choose to invest some or all of the donor advised fund, there is the potential that the balance of the account could go down due to negative market performance.
A DAF can help donors organize and centralize charitable giving within one account, simplifying recordkeeping, and gain tax efficiency within their long-term charitable planning. Many DAF owners choose to ‘bunch’ charitable donations every couple of years so that they get to itemize deductions and experience the deduction on that year’s tax return. This strategy is especially valuable in high-income years, during a business sale, or when managing uneven compensation such as bonuses or equity vesting. For example, if someone usually gives $10,000 per year to charity, they may choose to contribute $50,000 to a DAF in a single year so that they can realize more of the tax benefit. Then, they make gifts to their charities out of their DAF over the next 5-years.
While Donor Advised Funds are not a good vehicle to make gifts to family members (you can only make gifts/grants to qualified 501(c)(3) charities), some families choose to use DAFs as a tool to involve children or grandchildren in philanthropic discussions, host annual grantmaking meetings, and pass on charitable values. Donors may also name successor advisors or designate charitable beneficiaries to continue their charitable intent beyond their lifetime.
A Donor-Advised Fund offers flexibility, structure, and tax efficiency for individuals looking to align charitable giving with their financial plan. Whether you are seeking to manage a high-income year, simplify annual donations, or create a multigenerational charitable legacy, a DAF can provide a clear and impactful framework for your philanthropy.
If you’re exploring whether a Donor-Advised Fund aligns with your financial and charitable objectives, our team is here to help you evaluate contribution strategies, tax considerations, and long-term giving opportunities tailored to your goals. Schedule a call today, we’d love to speak with you. term giving opportunities tailored to your goals.
