Donor-Advised Funds: How They Fit Into Charitable Giving
A donor-advised fund can make charitable giving easier to organize, especially for people who want to make a large charitable contribution now and decide later which charities will ultimately receive the money. It can also help donors contribute appreciated investments, group several years of giving into one tax year, and involve family members in charitable decisions.
A donor-advised fund is not the right answer for every donor. The tax deduction generally occurs when assets are contributed to the fund, not when the fund later sends grants to charities. Once contributed, the assets legally belong to the sponsoring charitable organization. The donor may recommend grants and investments, but the donor no longer owns or controls the money.
What Is a Donor-Advised Fund?
A donor-advised fund, often called a DAF, is a charitable account maintained by a sponsoring organization. The sponsor may be a community foundation, a national charitable organization, or another qualified public charity.
A donor contributes cash or other property to the account. The sponsoring organization has legal control of the assets, while the donor or another named advisor generally may recommend how the funds are invested and which eligible charities should receive grants. The sponsor must retain final authority over those decisions.
Why Donors Use DAFs
A DAF can separate the timing of the tax deduction from the timing of the grants. That feature can be useful in a high-income year, after the sale of a business or investment, or when a donor wants time to research charitable organizations before recommending grants.
Common reasons for using a DAF include:
- Combining several years of planned charitable giving into one year, sometimes called bunching, to help exceed the standard deduction and the new charitable deduction floor for itemizers.
- Contributing appreciated publicly traded stock or other assets instead of selling them first. When the rules are satisfied, the donor may avoid recognizing the built-in capital gain and may be able to claim a deduction based on fair market value.
- Creating one organized record of charitable contributions and grant recommendations.
- Making grants over several years from assets that may remain invested inside the account.
- Involving children or other family members in a long-term charitable giving plan.
The sponsor may charge administrative and investment fees, impose minimum contribution or grant amounts, limit the assets it will accept, and establish its own grantmaking policies. Those details should be reviewed before opening an account.
The Timing of the Tax Deduction
The contribution to the sponsoring organization is the charitable gift for federal income tax purposes. If a donor contributes $25,000 to a DAF in 2026 and recommends $5,000 of grants in each of the next five years, the potential charitable deduction is tied to the $25,000 contribution in 2026. The later grants do not create additional deductions.
The deduction is not automatic. It depends on whether the donor itemizes, the type of property contributed, adjusted gross income limitations, documentation, valuation requirements, and other tax rules. Contributions that cannot be fully deducted in the current year may qualify for a carryforward, generally for up to five years, subject to the applicable limits.
Important 2026 Charitable Deduction Changes
Beginning in 2026, individuals who itemize may deduct only the portion of their charitable contributions that exceeds 0.5% of adjusted gross income. For example, if adjusted gross income is $200,000, the first $1,000 of otherwise deductible charitable contributions is below the floor.
The 2026 law also provides a limited charitable deduction for taxpayers who do not itemize: up to $1,000 for most filers and up to $2,000 for married couples filing jointly. However, that deduction is limited to qualifying cash contributions and does not apply to contributions to donor-advised funds.
This difference makes planning important. A DAF contribution may still be useful for an itemizing taxpayer, particularly when contributions are grouped into one year. A non-itemizing taxpayer who wants the new deduction may be better served by making qualifying cash gifts directly to eligible operating charities.
What a DAF Cannot Do
A donor may recommend grants, but the account cannot be treated like a personal charitable checking account. Important restrictions include:
- The donor cannot take the contributed assets back or use them for personal expenses.
- A grant cannot provide the donor, a donor advisor, or a related person with more than an incidental personal benefit.
- DAF funds generally should not be used to buy event tickets, pay for tables or meals, cover the benefit portion of a membership, or obtain goods or services for the donor.
- Grants generally must go to eligible charitable organizations. DAFs are not designed to make direct gifts to individuals.
- A qualified charitable distribution from an IRA cannot be made to a donor-advised fund. A QCD must go directly from the IRA trustee to an eligible charity.
Donors should check with the sponsoring organization before recommending a grant connected to a pledge, membership, fundraising event, foreign charity, private foundation, or another situation that may require additional review.
DAFs and Appreciated Property
One of the strongest potential uses of a DAF is the contribution of appreciated property. Suppose a donor owns publicly traded stock worth $30,000 that originally cost $8,000. If the donor sells the stock, the sale may create a taxable capital gain. If the donor contributes the stock directly to a qualified DAF sponsor and all requirements are met, the donor may be able to avoid recognizing that gain and claim a charitable deduction based on the stock's fair market value.
The result can be different for property held one year or less, tangible personal property, closely held business interests, cryptocurrency, real estate, or property subject to debt. Appraisal and Form 8283 requirements may apply. The sponsor also needs time to review and accept complex assets, so these gifts should not be left until the final days of the year.
How DAFs Fit With Direct Giving
A donor-advised fund should complement charitable giving, not automatically replace direct gifts. Direct giving may be simpler for regular cash donations, urgent community needs, small gifts, and contributions connected with events or benefits. It also puts funds in the charity's hands immediately.
A DAF may be more useful for a major gift, appreciated assets, bunching deductions, or a deliberate multiyear grant plan. Donors should also consider how quickly they intend to recommend grants. A tax deduction has already been claimed when assets enter the DAF, but the operating charities do not benefit until grants are actually distributed.
What Nonprofits Should Know
A nonprofit receiving a DAF grant typically receives the payment from the sponsoring organization, often with information identifying the donor who recommended it. The donor already received any charitable acknowledgment from the sponsor when the original DAF contribution was made. The nonprofit may thank the donor for recommending the grant, but it should avoid issuing a second charitable contribution receipt that suggests the donor may claim another deduction.
Nonprofits can make DAF giving easier by providing their exact legal name, employer identification number, mailing address, and clear program information. Strong public-facing Form 990 reporting and a current website can also help donors and sponsoring organizations verify eligibility and understand how funds will be used.
Questions to Ask Before Opening a DAF
- Will I itemize deductions in the year of the contribution?
- Would bunching several years of gifts create a better tax result?
- Do I own appreciated assets that may be more tax-efficient to donate than cash?
- What fees, minimums, investment choices, and grant restrictions apply?
- How quickly do I intend to recommend grants to operating charities?
- Who should serve as successor advisor, if the sponsor permits one?
The Bottom Line
A donor-advised fund can be a useful charitable planning tool, especially for donors who itemize, contribute appreciated assets, or want to organize a multiyear giving plan. Its flexibility comes with limits: the gift is irrevocable, the sponsor has legal control, personal benefits are prohibited, and the donor receives no second deduction when grants are later distributed.
The best approach depends on the donor's income, assets, deduction status, charitable goals, and the rules of the sponsoring organization. Reviewing the plan before transferring assets can help prevent missed deductions, year-end timing problems, and grants that the sponsor cannot approve.
The article is meant for informational purposes only. Please contact me directly to discuss how this applies to your individual tax situation.