Quick Answer
A donor advised fund (DAF) lets a donor make an irrevocable contribution to a sponsoring organization, take an immediate tax deduction, and then recommend grants to charities over time. Cash gifts deduct up to 60% of AGI; appreciated securities held over a year deduct at fair market value up to 30% of AGI.
A donor advised fund (DAF) is a charitable giving vehicle sponsored by an organization like a community foundation or a charitable arm of a brokerage firm, which legally owns and controls the fund once the donor's gift arrives.
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 to recommend for grants.
How Do 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: the donor recommends, but does not control, grants from the fund
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.
- Grants cannot go to individuals. A distribution from a DAF to any natural person is a "taxable distribution." The sponsoring organization owes a 20% excise tax on it, and a fund manager who knowingly agrees to it owes a 5% excise tax, capped at $10,000 per distribution. Grants must go to qualified public charities, not to people.
What Are the 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 |
What Are the 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.
How Does a DAF Compare to a Private Foundation?
| Feature | Donor Advised Fund | Private Foundation |
|---|---|---|
| Administrative costs | Lower | Higher |
| Control | Donor recommends, does not control | Donor has more control |
| Privacy | Grants can be anonymous | Public tax filings (Form 990-PF) |
| Minimum distribution | None required | Must distribute 5% annually |
| Excise tax | No annual excise tax on investment income, improper distributions are taxed | 1.39% annual tax on net investment income |
| Deduction for appreciated property | Fair market value, up to 30% of AGI | Cost basis for most property, up to 20% of AGI, but fair market value for publicly traded stock |
Exam Tip: Gotchas
- No minimum distribution requirement for DAFs. Unlike private foundations (which must distribute 5% annually), a DAF has no required payout timeline, though sponsoring organizations may have their own policies.
- Private foundations pay an annual excise tax on investment income; DAFs do not. But a DAF's sponsoring organization, fund manager, or advising donor can still owe excise tax on a taxable distribution or a prohibited benefit, as covered above.
- The private foundation cost basis rule has a big exception: publicly traded stock. Most appreciated property given to a private foundation is deductible only at cost basis, which is why a DAF is usually the better route. Stock with quoted prices on an established market keeps its full fair market value either way, so the classic "give the private foundation basis, give the DAF market value" contrast does not hold for listed shares.
What Should You Check on Exam Day?
- Remember the DAF contribution is irrevocable, and the donor only recommends grants; the donor does not control the sponsoring organization's decisions.
- Remember DAF grants must go to qualified public charities, not to individuals; a distribution to a natural person is a taxable distribution and triggers excise taxes.
- Remember the tax deduction is taken in the year of contribution, not when grants are later distributed to charities.
- Know the deduction limits: cash up to 60% of AGI, appreciated securities (held over 1 year) up to 30% of AGI at fair market value.
- Remember excess deductions carry forward up to 5 years, and there is no required minimum distribution from a DAF.
- Contrast a DAF with a private foundation: a DAF has lower administrative costs, no annual investment-income excise tax (though improper distributions are still taxed), and no required annual distribution, while a private foundation offers more donor control but must distribute 5% annually and pays a 1.39% tax on its net investment income.
- Remember the deduction split: a DAF takes fair market value up to 30% of AGI, a private foundation is cut to cost basis and 20% of AGI for most appreciated property, and publicly traded stock is the exception that keeps fair market value in either vehicle.