Quick Answer
A donor advised fund lets a donor make an irrevocable contribution to a sponsoring organization, take a tax deduction (subject to AGI limits and, starting in 2026, a new floor requiring itemized charitable gifts to exceed 0.5% of AGI), and later recommend grants to charities. The donor only has advisory privileges; the sponsoring organization holds legal control. Unlike a private foundation, a DAF has no minimum annual payout and offers higher deduction limits.
The final estate planning tool in this unit is the donor advised fund: a flexible, low-cost way for clients to make charitable contributions while receiving immediate tax benefits.
What Is a Donor Advised Fund?
- A charitable giving vehicle managed by a sponsoring organization: a public charity, such as a community foundation or a charity affiliated with a financial-services firm (e.g., Fidelity Charitable, Schwab Charitable)
- The donor makes an irrevocable contribution to the fund
- The donor receives an immediate income tax deduction in the year of the contribution
- The donor retains advisory privileges over how the funds are invested and which charities receive grants
- The sponsoring organization has legal control over the assets (the donor's role is advisory, not binding)
Exam Tip: Gotchas
- The sponsoring organization has legal control, not the donor. The donor can only recommend grants; the organization can technically refuse.
How DAFs Work
- Contribute: Donor makes an irrevocable gift to the DAF (cash, securities, or other assets)
- Deduct: Donor claims an income tax deduction for the full fair market value for eligible long-term appreciated property (subject to adjusted gross income (AGI) limits); short-term or ordinary-income property generally gets a smaller, basis-limited deduction
- Invest: Funds grow tax-free inside the DAF
- Grant: Donor recommends grants to qualified charities over time
Tax Benefits
- Immediate deduction: The tax deduction is available in the year of contribution, even if grants to charities are made years later
- Donating eligible long-term appreciated securities: Avoids capital gains tax on the appreciation AND provides a deduction for the full fair market value (short-term holdings generally only get a basis-limited deduction)
- Deduction limits: Up to 60% of AGI for cash contributions, up to 30% of AGI for eligible long-term appreciated securities (more favorable than private foundation limits); starting in 2026, itemized charitable deductions are also subject to a new floor, deductible only to the extent total contributions exceed 0.5% of AGI
- No minimum distribution requirements: Unlike private foundations, DAFs have no required annual payout
Exam Tip: Gotchas
- Donating eligible long-term appreciated securities to a DAF avoids capital gains tax on the appreciation AND provides a deduction for the full fair market value (FMV). This is a double tax benefit.
DAFs vs. Private Foundations
| Feature | Donor Advised Fund | Private Foundation |
|---|---|---|
| Setup cost | Low (often free) | High (legal, administrative) |
| Administrative burden | Minimal (sponsoring org handles it) | Significant (tax filings, audits) |
| Donor control | Advisory only | Full control |
| Tax deduction (cash) | Up to 60% of AGI | Up to 30% of AGI |
| Tax deduction (eligible long-term appreciated securities) | Up to 30% of AGI (FMV) | Up to 20% of AGI (cost basis for some assets) |
| Minimum annual payout | None | Roughly 5% of net investment assets annually |
| Excise tax on investment income | None | 1.39% |
| Privacy | Donor can remain anonymous | Public (Form 990-PF) |
| Typical fit | Lower setup cost, simplicity, smaller amounts | Donors wanting full control and willing to bear the higher cost/complexity |
Exam Tip: Gotchas
- DAFs have no minimum annual payout. Private foundations must distribute roughly 5% of net investment assets each year. This is a common comparison question.
- DAF donors get higher deduction limits (60% AGI for cash vs. 30% for private foundations).
Key Characteristics
- Contributions are irrevocable - once donated, the donor cannot take the assets back
- A simpler, cheaper alternative to private foundations for donors who don't need full control
- Contributions can be cash, publicly traded securities, or other assets (real estate, private stock in some cases)
- The fund grows tax-free (no capital gains or income tax on investment returns inside the DAF)
- Grants generally go to IRS-qualified 501(c)(3) public charities (other recipients are possible in limited cases if the sponsoring organization exercises "expenditure responsibility," but that's a detail beyond the exam-tested rule)
Exam Tip: Gotchas
- The donor gets an immediate tax deduction when they contribute to the DAF, not when they recommend a grant to charity. This "bunching" strategy lets donors front-load deductions in high-income years while distributing to charities over time.
- Contributions are irrevocable. Once assets go into the DAF, the donor cannot get them back.
What Should You Check on Exam Day?
- The donor's contribution is irrevocable and the sponsoring organization has legal control; the donor only has advisory privileges over investments and grants
- The tax deduction is claimed in the year of contribution, not when a grant is later recommended (the basis for the "bunching" strategy)
- Donating eligible long-term appreciated securities avoids capital gains tax on the appreciation and deducts the full fair market value
- DAFs have no minimum annual payout, unlike private foundations, which must distribute roughly 5% of net investment assets each year
- Deduction limits are more favorable than a private foundation's: up to 60% of AGI for cash, up to 30% of AGI for eligible long-term appreciated securities