Donor-Advised Funds Explained: A Flexible Way to Give

Donor-advised funds have become one of the most popular ways to give to charity in the United States. They offer a combination of tax benefits, flexibility and simplicity that appeals to donors at many giving levels. Here’s how donor-advised funds work and what to consider before opening one.

What a donor-advised fund is

A donor-advised fund, or DAF, is a charitable giving account held by a sponsoring public charity. Sponsors are often affiliated with investment firms, community foundations, religious organizations or universities.

When you contribute to a DAF, you’re making an irrevocable gift to the sponsoring charity, which holds and manages the money in an account associated with you. Later, you can recommend grants from your account to eligible charities, such as qualified public charities, over time. The sponsoring organization reviews your recommendations and, in most cases, follows them, as long as the recipients are eligible.

You can think of a DAF as a charitable savings account: you set money aside for charity now and decide where it goes later.

How donor-advised funds work

Opening a DAF is usually simple and can often be done online. Many sponsors have low or no minimum initial contributions, though some require a few thousand dollars or more.

You can contribute cash, appreciated stock and, at some sponsors, other assets, such as mutual fund shares, cryptocurrency, real estate or private business interests.

Once in the fund, your contributions can be invested in investment options offered by the sponsor, allowing the money to potentially grow over time.

When you’re ready, you recommend grants to the charities you want to support. You can recommend grants right away or spread them over many years. Many DAFs let you give anonymously if you prefer.

Tax benefits

You may be able to deduct your contribution in the year you make it, if you itemize deductions, subject to IRS limits based on your adjusted gross income. The deduction occurs when you contribute to the DAF, not when grants are made to charities.

Money in the fund can be invested and grow tax-free, potentially increasing the amount available for charitable giving.

Donating appreciated stock held more than a year can let you avoid capital gains tax on the appreciation and deduct the fair market value of the stock, within limits. Many smaller charities can’t easily accept stock donations, but DAFs can, then distribute cash grants to those charities.

Tax rules for charitable deductions can change, so check current IRS guidance.

Bunching gifts with a DAF

With a higher standard deduction, many people no longer itemize, meaning their charitable donations may not provide a tax benefit. Some donors use a DAF to bunch several years’ worth of giving into one year. By contributing a larger amount in a single year, their total itemized deductions may exceed the standard deduction, allowing them to itemize and receive a tax benefit that year.

They then grant the money to charities over the following years, maintaining consistent support for the organizations they care about while taking the standard deduction in other years.

DAFs can also be useful in high-income years, such as the year you sell a business, receive a large bonus or exercise stock options, when a charitable deduction may be especially valuable.

Things to know before opening a DAF

Contributions are irrevocable. Once you contribute to a DAF, the money must ultimately go to charity. You can’t withdraw it for personal use.

The sponsoring organization legally controls the fund. While sponsors usually follow your grant recommendations, they have final authority and may decline grants to ineligible organizations.

There are administrative and investment fees, which vary by sponsor. Compare fees, investment options and minimums before choosing a sponsor.

Grants can’t provide personal benefits to you. DAF grants generally can’t be used to pay for event tickets, dinners, memberships or other benefits you receive, or to fulfill personal pledges.

There’s generally no required payout timeline for individual DAF accounts, though some sponsors have policies encouraging regular grants. Critics have raised concerns that money can sit in DAFs for long periods without reaching charities, so consider how quickly you want your donations to make an impact.

DAFs generally can’t receive qualified charitable distributions from IRAs.

DAFs versus private foundations

Private foundations offer more control, including the ability to hire family members, make grants to individuals and more, but involve significant setup costs, ongoing administrative requirements, annual minimum distribution requirements, excise taxes on investment income and public disclosure. DAFs are simpler, less expensive and offer more favorable tax deduction limits, making them a practical choice for many donors.

Family giving

Many families use DAFs to involve children and grandchildren in choosing charities, building a tradition of giving across generations. Some sponsors allow you to name successors who can continue recommending grants after your death. Family members can research causes together, discuss values and decide how to allocate grants, making philanthropy a shared family experience.

Getting started

Compare sponsors based on fees, minimums, investment options, grant policies and the types of assets they accept. Consider talking with a tax professional or financial planner about how a DAF fits into your overall financial and charitable plans.