A donor-advised fund (DAF) is essentially a charitable investment account. You can contribute cash, securities, and other assets, with the understanding that those assets will ultimately be going to charitable organizations approved by the IRS.
Let’s talk about how these funds work, why you might want to establish a donor advised fund, and how to go about setting one up.
How a donor-advised fund works
DAFs are a tax-advantaged way to manage charitable giving over time. They help separate the act of giving from the donations so that you can take advantage of larger than normal income years, gain tax benefits, and allow your contributions to grow in the market.
Donations made to a DAF are deductible in the year they are made, assuming you’re itemizing your deductions. The money is then invested by the fund managers and accumulates until grants to charitable organizations are distributed over time.
Because donations to a DAF aren’t tied to when grants are distributed, donors will often concentrate their contributions over a relatively short time period in order to get a larger upfront charitable deduction on their taxes, while the grants can be distributed over a longer time frame.
The donor-advised fund also provides professional management of the money donated, allowing that money to potentially grow, which can enhance the amounts donated to charities.
It’s important to know that while donors can suggest when and to what charities the grants are distributed, the final decision on this lies with the DAF sponsor. (More on that in a bit.)
In other words, if having control over the grants is important to you, a DAF may not be your best option. But if maximizing your tax deductions is a priority, a donor-advised fund may help you do that.
Is a donor-advised fund for you?
A DAF can offer a number of tax and other benefits for investors with charitable inclinations.1
Tax benefits
The basic tax benefit is the same as with any charitable donation; as long as your tax situation allows you to itemize deductions, you can deduct any contributions to the donor-advised fund in the year they’re made. This includes the value of any cash donations, securities, or other assets that are donated.
Donating appreciated assets can have a double tax benefit. Not only can you deduct the value of the donated asset (as long as you can itemize it), but you can also avoid the capital gains taxes that you would have incurred if you’d sold the asset outright before moving the proceeds to the donor-advised fund.
Simply giving the appreciated assets to the donor-advised fund saves you from paying long- or short-term capital gains taxes. This method also keeps this income out of your adjusted gross income (AGI), which can be helpful in other ways. For those on Medicare, you could be subject to the Medicare IRMAA surcharge if your income exceeds a certain level; capital gains become part of your AGI and could trigger IRMAA.
Estate planning
A donor-advised fund can also be part of your estate planning. Money that’s already been contributed to a DAF will not be counted as part of your estate. For those with estates approaching $13.99 million (which is the cutoff for estate tax exemptions in 2025), this can be an effective way to reduce the size of your estate and limit tax payouts.
Downsides of a donor-advised fund
While a DAF has a number of pros, there are a few potential cons to them as well.
- Although you can make suggestions as to which charities receive grants from your DAF, ultimately it’s the fund managers who make the final decision here.
- There is typically no deadline for when the funds in a DAF account must be distributed to charities, meaning that, in some cases, money can stay in your DAF longer than you might like.
- Donations to a DAF are irrevocable once they've been made. Even though the money you've moved to your DAF will likely be invested inside the fund for a few years before it’s donated to a charity, you can’t go to the DAF manager and request a refund.
- DAFs typically have management fees and expenses. Look into the fee structure before investing to be sure your donation won’t be eaten up by extra costs.
How to set up a donor-advised fund
A DAF can be established through several types of organizations. These include:
Community foundations. These are independent foundations often focused on supporting charities within a specific geographic area. They tend to appeal to donors who specifically want to support local charities, or charities within a region.
National donor-advised fund organizations. In many cases, these are the charitable arms of financial institutions. These DAFs generally have a broad national charitable focus. Some examples include the Vanguard Charitable Endowment Program, the Schwab Charitable Fund, and the Fidelity Giving Account.
Public charities and foundations. Hospitals, universities and religious organizations generally create their own DAFs to support their own needs or causes.
Making contributions to a DAF
The sponsoring organization often has a minimum contribution requirement to open a DAF account, which may be in the $5,000 to $25,000 range or higher.
Donors can send cash in the form of a check or electronic transfer, or they can donate other assets.2
Appreciated securities. These can be shares of individual stocks or bonds, as well as mutual funds or ETFs. Similar to using appreciated securities to make a direct charitable contribution, this method allows for a tax deduction based on the market value of the securities (on the date of the donation).
Additionally, this allows you to avoid incurring capital gains taxes, which would otherwise come into play if you sold the appreciated securities first and then donated the proceeds after that.
Art and collectibles. In some cases, a DAF will accept donations of artwork or collectibles. With these types of assets, you’ll generally need to have an appraiser come to determine the value of the donated assets. This is key not only to determine the amount of money to be added to your DAF account, but also the amount you can deduct for taxes.
Donating art, collectibles, or similar assets can be a good idea from a liquidity perspective. Depending upon the actual piece, these assets may have limited liquidity. Giving them to a DAF account can save you the effort and potential headaches of trying to sell them for cash. As you might expect, donating them to a DAF can eliminate any potential capital gains taxes that might result from an outright sale.3
Private business interests. This can include a number of private stocks and related business interests:
- Private company C-corp shares
- Private company S-corp shares
- LLC and limited partnership interest
- Pre IPO shares
In several of these (and some related cases), you may need to get an appraisal to determine the fair market value, which in turn determines the value of your donation.
Various non-traded assets. There are a number of other non-traded assets that can be donated to a DAF. Some examples include:
- Bitcoin and other cryptocurrencies
- Shares of restricted stock
- Retirement account assets
- Private equity
- Life insurance
- Hedge fund shares
These and other types of non-publicly traded assets can make solid donation vehicles to a DAF. As with a few of the other types of assets discussed above, some of these assets might require an appraisal or other type of valuation before you make the gift to your DAF.
Conclusion
A donor-advised fund, or DAF, can be an effective charitable giving vehicle for investors in the right situation. Be sure that you can structure things to maximize your tax benefits, and look at any appreciated assets that might make solid donations. It might be a great fit for your financial plan AND charitable intentions.
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