Donor-Advised Funds Guide

What is a Donor-Advised Fund?

A Donor-Advised Fund (DAF) is a charitable giving account that allows you to make a tax-deductible contribution, invest the funds for tax-free growth, and recommend grants to qualified charities over time. Think of it as a charitable savings account that gives you immediate tax benefits while letting you support causes on your own schedule.

How Donor-Advised Funds Work

The DAF Process Step-by-Step

Key Features of DAFs

• Immediate tax deduction: Full deduction in contribution year
• Irrevocable gift: Once contributed, can't take money back
• Advisory role: You recommend grants; sponsor must approve
• Tax-free growth: Investment returns not taxed
• No time limit: Grant on your schedule
• Simple administration: Sponsor handles paperwork
• Privacy option: Can grant anonymously

Benefits of Donor-Advised Funds

Tax Advantages

Strategic Giving Benefits

• Flexible timing: Separate tax decision from giving decision
• Multi-year planning: Fund several years of giving at once
• Emergency reserve: Have funds ready for disaster relief
• Family involvement: Include children in grantmaking decisions
• Legacy planning: Name successors to continue giving
• Anonymous giving: Grants can be made without your name

Administrative Benefits

• One tax receipt instead of many
• Consolidated giving record
• No need to track individual donation receipts
• Online platform for easy grantmaking
• Professional investment management
• Compliance handled by sponsor

Who Should Use a Donor-Advised Fund?

Ideal DAF Candidates

When DAFs May Not Be Best

• Small donations: Under $5,000 (fees may outweigh benefits)
• Immediate needs: Charity needs funds now, not over time
• Want control: Prefer direct relationship with charities
• Non-qualifying causes: Want to support individuals, political causes
• Need flexibility: Might want money back (DAFs are irrevocable)

Major DAF Providers

National Sponsors

Community Foundation DAFs

• Local focus: Community-specific grantmaking
• Personal service: High-touch relationship
• Local expertise: Know area nonprofits well
• Minimums: Typically $10,000-$25,000
• Fees: 1-1.5% annually
• Find: Search "community foundation" + your city

Setting Up Your DAF

Steps to Open a DAF Account

1. Choose provider: Compare fees, minimums, investment options
2. Complete application: Online process, typically 15-30 minutes
3. Name your fund: Your name, family name, or anonymous
4. Name successors: Who can advise grants after you
5. Make initial contribution: Cash, stock, or other assets
6. Select investments: Choose risk tolerance and portfolio
7. Start granting: Recommend grants to charities

What You Can Contribute

• Cash: Check, wire transfer, credit card
• Publicly traded securities: Stocks, bonds, ETFs, mutual funds
• Private stock: Closely-held business interests (some restrictions)
• Real estate: Property donations (more complex)
• Cryptocurrency: Bitcoin, Ethereum (growing acceptance)
• Complex assets: Restricted stock, limited partnership interests

DAF Fees and Costs

Fee Structure Breakdown

Comparing Provider Costs

• National sponsors typically cheaper for balances over $250,000
• Community foundations offer personal service despite higher fees
• Online-only providers have lowest costs
• Calculate total cost: administrative + investment fees

Tax Deduction Rules for DAFs

Deduction Limits

• Cash contributions: Up to 60% of AGI
• Appreciated securities: Up to 30% of AGI
• Real estate and other property: Up to 30% of AGI
• Carryforward: Excess deductions carry forward 5 years

Valuation of Contributions

• Cash: Dollar amount contributed
• Publicly traded stock: Fair market value on date of transfer
• Private stock: Qualified appraisal required for over $10,000
• Real estate: Qualified appraisal always required
• Cryptocurrency: Fair market value at time of donation

Making Grants from Your DAF

Grant Process

1. Log into DAF online account
2. Search for charity by name or EIN
3. Enter grant amount
4. Add optional note to charity
5. Choose anonymous or named grant
6. Submit recommendation
7. Sponsor reviews and approves (usually 1-3 business days)
8. Check sent to charity

Grant Requirements

• Must be to IRS-qualified 501(c)(3) charity
• Cannot fulfill legally binding pledge
• Cannot receive benefit in exchange (tickets, meals, etc.)
• Cannot direct grant to specific individual
• Sponsor has final approval authority

Strategic Grantmaking

DAF Investment Options

Typical Investment Choices

• Conservative: 20-40% stocks, rest bonds/cash
• Moderate: 50-70% stocks, rest bonds
• Growth: 80-100% stocks
• Index funds: Low-cost market tracking
• Socially responsible: ESG investment options
• Custom: Build your own allocation

Investment Strategy Considerations

• Time horizon: Longer timeline = more growth potential
• Grant schedule: When will you need funds?
• Risk tolerance: Comfort with value fluctuations
• Tax efficiency: All growth remains tax-free
• Rebalancing: Most providers offer automatic rebalancing

Advanced DAF Strategies

Bunching Strategy

Appreciated Stock Donation

Example showing tax savings:

• Stock purchased for $10,000, now worth $30,000
• Capital gain: $20,000
• If sold: Pay $4,000 tax (20% capital gains), donate $26,000
• If donated to DAF: No tax, full $30,000 charitable deduction
• Result: $4,000 more to charity + larger tax deduction

DAF vs Other Giving Vehicles