Donor Advised Funds (DAFs)
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 (community foundation, financial institution like Fidelity Charitable or 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 (subject to adjusted gross income (AGI) limits)
- 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 appreciated securities: Avoids capital gains tax on the appreciation AND provides a deduction for the full fair market value
- Deduction limits: Up to 60% of AGI for cash contributions, up to 30% of AGI for appreciated securities (more favorable than private foundation limits)
- No minimum distribution requirements: Unlike private foundations, DAFs have no required annual payout
Exam Tip: Gotchas
- Donating 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 (appreciated assets) | Up to 30% of AGI (FMV) | Up to 20% of AGI (cost basis for some assets) |
| Minimum annual payout | None | 5% of assets annually |
| Excise tax on investment income | None | 1.39% |
| Privacy | Donor can remain anonymous | Public (Form 990-PF) |
| Best for | Most donors, smaller amounts | Very high-net-worth donors who want full control |
Exam Tip: Gotchas
- DAFs have no minimum annual payout. Private foundations must distribute at least 5% of 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
- Increasingly popular as a simpler, cheaper alternative to private foundations
- 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 must go to IRS-qualified 501(c)(3) organizations
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.