Donor Advised Funds
A donor advised fund (DAF) is a charitable giving vehicle that allows donors to make an irrevocable contribution, receive an immediate tax deduction, and then recommend grants to charities over time.
Think of it this way: You write one big check to the DAF now, get the tax break immediately, and then take your time deciding which charities actually receive the money.
How Donor Advised Funds Work
- Donor contributes cash, securities, or other assets to the DAF
- Immediate tax deduction: Donor receives a charitable deduction in the year of contribution
- Assets grow tax-free inside the fund (invested by the sponsoring organization)
- Donor recommends grants to qualified 501(c)(3) charities over time
- Sponsoring organization has legal control but typically follows donor recommendations
Exam Tip: Gotchas
- Irrevocable contribution, advisory grants. Once assets are in the DAF, the donor cannot take them back. The donor can only recommend where grants go; the sponsoring organization has the final say.
Key DAF Features
| Feature | Detail |
|---|---|
| Contribution | Irrevocable (cannot be taken back) |
| Tax deduction | Immediate, in the year of contribution |
| Investment growth | Tax-free inside the fund |
| Grant timing | Donor decides when to recommend grants |
| No minimum distribution | No timeline to make grants (though sponsoring orgs may have their own policies) |
| Investment recommendations | Donor can recommend investments within the fund |
| Sponsoring organizations | Fidelity Charitable, Schwab Charitable, community foundations |
Tax Benefits
- Cash contributions: Deductible up to 60% of adjusted gross income (AGI)
- Appreciated securities (held > 1 year): Deductible at fair market value (FMV), up to 30% of AGI, with no capital gains tax on the appreciation
- Excess deductions can be carried forward up to 5 years
- Bunching strategy: Contribute several years' worth of charitable gifts in one year to exceed the standard deduction, then recommend grants over multiple years
Exam Tip: Gotchas
- Appreciated securities = double tax benefit. No capital gains tax on the appreciation, plus a deduction at full fair market value. This is the most tax-efficient way to give.
DAF vs Private Foundation
| Feature | Donor Advised Fund | Private Foundation |
|---|---|---|
| Startup cost | Low (often $0-$5,000) | High (legal fees, administration) |
| Administration | Handled by sponsor | Donor responsible |
| Tax deduction (cash) | Up to 60% of AGI | Up to 30% of AGI |
| Tax deduction (appreciated assets) | FMV, up to 30% of AGI | Cost basis, up to 20% of AGI |
| Privacy | Grants can be anonymous | Public tax filings (Form 990-PF) |
| Minimum distribution | None required | Must distribute 5% annually |
| Excise tax | None | 1.39% net investment income tax |
Memory Aid: DAF = Double the deduction ceiling (60% cash / 30% appreciated). Private foundation = Half that (30% cash / 20% appreciated).
Exam Tip: Gotchas
- No minimum distribution requirement for DAFs. Unlike private foundations (which must distribute 5% annually), a DAF has no required payout timeline. Assets can sit indefinitely. Critics call this "a tax break without a deadline."
- Private foundation excise tax on investment income. DAFs pay none; private foundations owe 1.39% on net investment income every year.