Despite what many people may think, you do not need to be an ultra-wealthy philanthropist to give efficiently and with purpose. If you’re looking for a smarter way to give, Donor Advised Funds (DAFs) can offer substantial tax savings without compromising flexibility. This guide breaks down what DAFs are, how they work, why they have become so popular, and what you should consider before opening one. If you’re already familiar with the benefits of other tax-advantaged accounts like 529 college savings plans or Roth IRAs for retirement, then you’ll quickly grasp how a DAF can play that role for your charitable giving.
What is a Donor Advised Fund?
A Donor Advised Fund (DAF) is a giving account whereby you make a charitable contribution today and then recommend donations to charities from that account over time. Sponsoring organizations, such as Schwab Charitable and Fidelity Charitable, administer DAFs. Since these entities are 501(c)(3) organizations, contributions to your DAF qualify for immediate tax benefits. Thanks to enhanced technology platforms and increased awareness, DAFs are becoming a go-to tool for those looking to incorporate philanthropy into their financial goals. In its simplest terms, a DAF is a separate account dedicated to charitable giving.
DAFs are not new. The concept dates back to the 1930s when community foundations first started offering donor-managed giving accounts, but they really started to gain momentum in the 1990s when major financial firms like Fidelity, Schwab, and Vanguard launched their own DAF programs, opening them up to a wider audience. Suddenly, individuals who wouldn’t necessarily consider themselves among the ranks of the wealthy could leverage DAFs to multiply their charitable impact and secure significant tax benefits. In fact, managing a DAF is often easier than you might think; modern technology has only amplified the ease of making contributions and recommending grants. Donors can typically request a donation with just a call or email to their advisor.
Tax-Smart Giving on Your Schedule
One of the primary benefits of a DAF is that it empowers you to strategically separate your charitable contribution from your actual grant-making. This means you can seize the opportunity to claim your federal tax deduction by funding your DAF when it’s most advantageous from a tax planning standpoint, without needing to decide immediately which specific charities to support. You then have the freedom to recommend grants to your favored non-profits over your lifetime.
With proper planning, donations to a DAF can significantly reduce taxes:
- Capital Gains Tax Avoidance: Contributing an asset to a DAF that has been owned for over one year exempts the asset from capital gains taxes, which would otherwise apply if the asset were sold directly. This means 100% of the asset’s value can go toward your charitable goals.
- Potential for Reduced Federal Income Tax: If you itemize deductions, you get an added federal income tax reduction, subject to IRS limits.
- State Income Tax Savings: Contributing to a DAF provides added savings on state and local income taxes, especially for those in high tax states like New York or California (where approximate state and local tax rates can be around 10%), compared to states like Florida and Texas with no state income tax.
- No Taxes on Future Earnings: Any investment earnings inside your DAF such as interest or dividends are not subject to taxation, allowing your philanthropic capital to grow tax-free over time.
Your Vision, Your Fund, Made Simple
The appeal of DAFs extends beyond tax savings. Establishing a DAF can help donors formulate a clearer vision for their charitable goals, promoting a sense of connection, strategy, and intention in their giving.
A prime example of this is the name of a Donor Advised Fund. Whether it’s the “Smith Family Giving Fund” in honor of a loved one, or a name that reflects your passions like the “Jane Doe Animal Welfare Fund” or the “Doe Family Medical Research Fund,” this unique personalization helps donors solidify their values and engage with charitable organizations in a more thoughtful and impactful way.
Additionally, when compared to establishing a private foundation, they offer a seamless experience:
- No onerous legal fees or convoluted startup paperwork: You can bypass the considerable time and expense typically associated with creating and maintaining a separate legal entity.
- Lower costs and ongoing fees: Forget the administrative overhead; DAFs boast significantly reduced administrative burdens and associated costs compared to operating a private foundation.
- No annual minimum payout required: This is a crucial distinction. Unlike private foundations, which are generally required to distribute 5% of their assets each year, a DAF offers the flexibility to recommend grants on your own timeline, allowing you to build your philanthropic capital over time.
- Enhanced privacy: While private foundation grants are on public record, DAFs offer the flexibility of marking a gift as anonymous if you choose.
Bunching Donations: Why DAFs Became Even More Popular After 2017
The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the attractiveness and popularity of DAFs, nearly doubling the standard deduction, making eligibility of itemized deductions more difficult. This change affected the tax benefits for individuals who regularly make charitable donations on an annual basis. Fortunately, there is a workaround.
Many donors now use a strategy called “bunching” through which several years’ worth of charitable donations are made in one year to exceed the standard deduction threshold, take the deduction, and then spread the grants to charities over time using a DAF. By 2023, there were over 1.78 million DAF accounts in the U.S. that granted over $54.77 billion to charities, highlighting how DAFs are scaling impact nationwide.1
For example, suppose you envision giving $5,000 to charity every year on average. Instead, you could donate $25,000-$50,000 to a DAF to get a larger tax deduction now, and your DAF could have upwards of a decade’s worth of donations pre-funded. This strategy helps minimize taxes while maintaining control of the amount and timing of your charitable giving.
Concentrated Stock Conundrum
It’s common for a substantial amount of an individual’s wealth to be concentrated in a single stock, often obtained from their employer through Incentive Stock Options (ISOs) or Restricted Stock Units (RSUs). This concentration presents a unique risk: a sudden market downturn or company-specific setback could disproportionately impact their entire net worth. While holding company stock can bring personal gratification, the decision to diversify often presents a perplexing dilemma. The unwillingness to sell is influenced by the desire to avoid capital gains taxes, as well as an attachment to the company.
This is where a DAF offers a strategic gambit. By contributing highly appreciated, concentrated company stock directly to a DAF, individuals also benefit from portfolio diversification. The DAF immediately takes ownership and liquidates the shares, converting them into diversified charitable capital without triggering personal tax consequences. This transforms a challenging financial decision into a fulfilling act of philanthropy.
Getting Started with Your Donor Advised Fund
If you and your advisor have determined that a DAF is the right fit for you, here’s what the process usually looks like:
- Open a DAF Account: Choose a sponsoring organization (like Fidelity Charitable or Schwab Charitable) and establish your Donor Advised Fund account, giving it a name that reflects your philanthropic vision.
- Contribute Assets: While funding a DAF with cash is always an option, using appreciated investments such as stocks or mutual funds is typically more advantageous from a tax perspective. Some DAFs accept more complex assets like cryptocurrency (e.g., Bitcoin, Ethereum), real estate, and private business interests, though these may require additional planning.
- Choose an Investment Allocation: After contributing your assets, you can select from a range of strategies, varying from conservative to aggressive, to potentially grow your DAF over time. A significant benefit here is that any investment earnings within the DAF are tax-exempt.
- Make Grant Recommendations: When ready, you can begin recommending grants to qualified 501(c)(3) nonprofits in scheduled or ad hoc increments, or a combination of the two.
While DAFs are usually set up quickly, it’s recommended to start the process well before year-end to ensure the deduction is applied to the intended tax year.
Contributions That Evolve With Your Family
One of the most powerful — and often overlooked — benefits of a DAF is the ability to involve your family in meaningful, values-driven giving. When you set up your fund, you can name successor advisors, family members, or trusted individuals who can continue to recommend grants.
Additionally, when a family wants to introduce their next generation to financial concepts, DAFs can be a great starting point. They cover various aspects that help build financial literacy while also reinforcing the family’s personal causes and values. Some donors even involve the younger generation in researching nonprofits and participating in grant decision-making. Many donors find involving their family in making grant recommendations to be especially gratifying.
In lieu of adding a successor advisor, you can also set up legacy instructions to direct the remaining funds to specific charities, splitting the balance among causes you care about and ensuring your charitable vision lives on even after you’re no longer making the decisions yourself.
Are There Any Caveats to Using a DAF?
Like any financial tool, DAFs are not perfect. Here are a few considerations:
- Irrevocable: Once you contribute to a DAF, that money can’t come back. The funds must be exclusively allocated for charitable purposes. Unlike a retirement or college savings account where you could theoretically pay penalties to get some of your money back out, that is not an option with a Donor Advised Fund. So, make sure you’re comfortable parting with it.
- Fees: While DAFs are highly effective at reducing taxes and far more cost efficient than running a private foundation, DAF sponsors typically charge administrative fees of around 0.6-1.0% annually. Investment options also carry fund-level fees. Although the benefits usually outweigh the costs, the costs still warrant consideration.
- No Required Grant Timing: Unlike foundations (which must give 5% per year), DAFs have no legal requirement to distribute funds annually. While such flexibility can be beneficial, some critics contend that it may cause delays in funds reaching nonprofit organizations. If you want to delay giving, this is not a bad thing.
- Less Direct Control: You “recommend” grants, but the DAF sponsor must approve them. They almost always do, assuming the charity is IRS-qualified, but it’s technically not your money anymore. Unless you receive some personal benefit from the grant, it’s not likely to be an issue.
A New Beginning to Your Giving
Charitable giving should feel good and smart. With a DAF, it can be both. A Donor Advised Fund is one of the most effective ways to streamline your charitable giving, reduce taxes, and build a legacy of generosity. With low startup barriers, powerful tax benefits, flexible giving options, and room for your family values to shine, it’s no surprise they’re increasingly popular.
Whether you want to give during a high-income year, donate appreciated assets, or just bring more intentionality to your philanthropy, opening a DAF is strongly worth considering. If you want to discuss whether a DAF is appropriate for your philanthropic goals, our team can help you think it through.
Finally, if you or a loved one is over 70½ or approaching that age, consider utilizing Qualified Charitable Distributions. Both tools have unique benefits, and our advisors can help design a tax-efficient charitable gifting strategy tailored to you.
If you'd like to discuss a strategy for your charitable giving, we invite you to request a complimentary consultation.
[1] Source: National Philanthropic Trust’s 2024 DAF Report
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