Donor-advised funds are a popular way to support eligible nonprofits while benefiting from charitable tax deductions. With a DAF, you can generally claim a deduction when you contribute to it and recommend grants to charities over time, often in a later tax year. This flexibility has contributed to the growth of DAFs in recent years.
How it works
To open a DAF, you establish a giving account with a sponsoring organization that is structured as a 501(c)(3). You may fund the DAF with cash, publicly traded securities, and—depending on the sponsor—certain non-publicly traded assets such as private business interests or cryptocurrency. Your contribution is generally eligible for an immediate charitable deduction.
The assets in the DAF will be invested in options provided by the sponsor. While you can help guide the investments, you will have ceded legal control of the fund, and the sponsor has final authority over investments.
You may then use the DAF to recommend grants to eligible nonprofits. The sponsor has the final say over these grants, and while they will generally make the distributions you request, they must adhere to certain policies and legal restrictions.
Why choose a DAF
DAFs are convenient. The sponsor handles tasks such as investment administration, grant processing, tax documentation, records maintenance, and account reporting. DAFs also allow you to manage the timing of charitable deductions. If you are close to the threshold between itemizing deductions and taking the standard deduction, you may be able to make a larger charitable grant from the DAF in a year when an itemized deduction is most advantageous. In subsequent years, you can continue to support charity while taking the standard deduction. This approach is often called bundling.
DAFs can also be beneficial if you have assets that have appreciated significantly. When you donate stock or property with a low-cost basis to a DAF, you generally will not incur capital gains tax on the appreciated value. In many cases, donated stocks, bonds, and mutual funds are instead deductible at fair market value.
Costs, limits, and criticism
DAFs often charge fees, which can include administrative and investment-related costs. Sponsors also vary regarding the minimum required to open an account and minimum balances. Critics have raised concerns about DAFs because donors can claim an immediate tax deduction even if grants are not made to nonprofits for some time. Critics and reform advocates have proposed changes, including requiring payouts within a set period (such as 15 years) or delaying tax deductions until grants are made to eligible nonprofits.
Consider whether it fits
A DAF can be a useful option if you want to simplify giving, contribute when it is financially advantageous, and recommend grants over time. A DAF can support eligible organizations, which may include local nonprofits, houses of worship, or charities with international impact. You can set the pace that matches your goals. DAFs can also serve as a long-term giving tool for donors interested in building a charitable legacy.
As with any tax-driven strategy, the right choice depends on your broader financial picture, giving goals and comfort with the trade-offs, especially the loss of legal control, the fees and the timing questions that have attracted criticism. Before establishing a DAF, it’s wise to review sponsor options, fee structures, and distribution policies, as well as consult a qualified tax or financial professional to ensure the arrangement aligns with your broader goals.
If you have questions about if a DAF if right for you, our Estate Planning team is here to help. Contact us today to learn more.
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