Donor Advised Funds

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?

1. Donor contributes cash, securities, or other assets to the DAF
2. Immediate tax deduction: Donor receives a charitable deduction in the year of contribution
3. Assets grow tax-free inside the fund (invested by the sponsoring organization)
4. Donor recommends grants to qualified 501(c)(3) charities over time
5. 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?

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
• 0.5% AGI floor: For tax years starting after 2025, a new floor subtracts 0.5% of AGI from every itemized charitable deduction, on top of the 60%/30% ceilings above. A client with $200,000 of AGI loses the first $1,000 of giving every year, even on a gift well under the ceiling

Exam Tip: Gotchas

• There is no single AGI ceiling. The limit follows the type of asset: 60% for cash, 30% for appreciated securities held more than one year. The 60% figure is the largest number, so it is the common wrong pick for a securities gift. Securities are deducted at full fair market value, but only up to 30% of AGI.
• Appreciated securities = double tax benefit. For securities held more than one year: no capital gains tax on the appreciation, plus a deduction at full fair market value.
• The 0.5% floor applies even under the ceiling. A $70,000 cash gift on $200,000 of AGI stays well under the $120,000 (60%) ceiling, but the floor still disallows the first $1,000, so the deduction is $69,000. A gift that exceeds its ceiling adds the floor amount to the carryforward instead of losing it.

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 more than one year up to 30% of AGI at fair market value, minus a new 0.5% AGI floor (tax years after 2025) on both ceilings.
• Remember excess deductions carry forward up to 5 years, and there is no required minimum distribution from a DAF.