By Allen Giese, CLU®, ChFC®, ChSNC®, and ChatGPT
As financial planners, we often speak with clients who are focused not only on growing their wealth but also on using that wealth to make a lasting impact. If charitable giving is part of your values or legacy planning, one vehicle that deserves your attention is the donor-advised fund, or DAF.
DAFs have grown rapidly in popularity over the past decade, and for good reason: They offer a flexible, tax-efficient way to support the causes you care about, without the complexity or cost of starting a private foundation. In this article, we’ll explain what a DAF is, how it works, and why it may be a smart move for your financial and philanthropic goals.
What Is a Donor-Advised Fund (DAF)?
A donor-advised fund is a charitable giving account offered by a sponsoring organization, such as a public charity, community foundation, or financial institution. A DAF allows you to contribute assets, receive an immediate tax deduction, and recommend grants to charitable organizations over time.
Think of it as a personal charitable investment account. You can “donate now, decide later.” Once your assets are in the fund, they are irrevocably committed to charity, but you retain the ability to advise on how and when those funds are distributed.
How Does a DAF Work?
Here’s a step-by-step breakdown:
Make a Contribution: You contribute cash, appreciated securities, or other assets (e.g., real estate or privately held stock) to the DAF. The sponsoring organization receives and manages the assets.
Receive a Tax Deduction: You get an immediate income tax deduction for the full fair market value of the donation, subject to IRS limits. For appreciated assets, you also avoid capital gains taxes.
Invest the Funds: Your contribution can be invested within the DAF, and any growth is tax-free. This allows your charitable dollars to potentially grow before you make grants.
Recommend Grants: Over time, you can recommend grants to over 1.5 million IRS-qualified public charities. You can support multiple organizations on your schedule, and even do so anonymously if desired.
Why Should You Consider a Donor-Advised Fund?
There are several compelling reasons to consider opening a DAF, especially if you’re looking to maximize the impact of your giving while also aligning with broader financial planning goals.
Immediate Tax Benefits, Flexible Giving Timeline: Many people are drawn to DAFs because they want to lock in a charitable deduction in a high-income year but haven’t decided where to donate. With a DAF, you can contribute today and recommend grants over months or even years. This is especially beneficial during a liquidity event, such as selling a business or receiving a large bonus.
Donating Appreciated Assets = Greater Impact: One of the most powerful features of a DAF is the ability to donate long-term appreciated securities. When you do this, you avoid paying capital gains tax on the appreciation and still get a deduction for the full fair market value. More money ends up in your DAF—and ultimately, in the hands of the nonprofits you support.
Low Cost and Less Complexity: Compared to private foundations, DAFs are generally simpler and cheaper to establish and maintain. There are no start-up costs, no legal fees, no annual tax filings for you to manage, and lower administrative overhead. Most sponsoring organizations handle all the grant disbursements, recordkeeping, and compliance for you.
Anonymity and Privacy: If you want to give anonymously, a DAF provides that option. You can choose whether to disclose your identity to the organizations you support, which isn’t as easily done with personal checks or private foundations.
Family Engagement and Legacy Planning: DAFs can be a wonderful way to involve family in charitable giving. You can name your children or other loved ones as successor advisors to continue recommending grants after you’re gone. It’s a meaningful way to pass down philanthropic values and create a multi-generational legacy of giving.
Is a DAF Right for You?
While DAFs are a great tool, they aren’t a one-size-fits-all solution. Here are a few scenarios where a DAF could be particularly useful:
You have a windfall year and want to reduce your taxable income.
You want to make a large charitable donation but haven’t decided on specific nonprofits yet.
You regularly give to charity and want to streamline your giving.
You own appreciated assets and want to maximize your charitable impact.
You want to involve your children in giving or planning your philanthropic legacy.
If you’re considering a DAF, it’s important to speak with your financial advisor or tax professional to understand how it fits into your broader financial plan. There may be contribution limits, strategic timing opportunities, or estate planning considerations that can enhance your approach.
Final Thoughts
Donor-advised funds are a powerful tool for charitable individuals who want to give strategically, reduce taxes, and simplify the giving process. Whether you’re just beginning to explore philanthropy or you’re a seasoned donor looking for a smarter way to give, a DAF might be exactly what you need.
At Northstar Financial Planners, we help our clients evaluate charitable giving strategies that align with their financial goals and personal values. If you’d like to learn more about setting up a donor-advised fund—or want help determining if it’s the right choice for you—please don’t hesitate to reach out. We’d be happy to guide you through the options.
Your wealth is not just what you accumulate—it’s also what you choose to share.
Let’s make it count.