Donor-Advised Funds: A Smart Strategy for Charitable Giving and Tax Planning

Garrett Grigas, CFA, CFP® |

Donor-Advised Funds: A Smart Strategy for Charitable Giving and Tax Planning

For individuals and families looking to make a lasting philanthropic impact while optimizing their tax situation, Donor-Advised Funds (DAFs) have become one of the most effective and flexible tools available. These charitable investment accounts allow you to contribute, grow, and grant funds to your favorite nonprofit organizations—on your own timeline.

What Is a Donor-Advised Fund?

A Donor-Advised Fund is a giving vehicle established at a public charity. After contributing to a DAF, donors receive an immediate tax deduction while maintaining advisory privileges over how the funds are invested and ultimately granted to IRS-qualified charities.

In essence, a DAF allows you to separate the tax event (your charitable contribution) from the giving decision (when and where to grant the funds). This flexibility can be incredibly valuable for both philanthropic and financial planning.

How It Works

  1. Contribute Assets
    You can contribute cash, appreciated securities, or even complex assets (like real estate or business interests) to a donor-advised fund. These contributions are irrevocable and qualify for an immediate charitable tax deduction.
  2. Receive a Tax Deduction
    In the year of the contribution, you’ll receive a deduction up to the allowable limits (60% of AGI for cash, 30% for appreciated assets).
  3. Invest the Funds
    The assets in your DAF can be invested and grow tax-free, giving you more charitable capital over time.
  4. Recommend Grants
    When you’re ready, you can recommend grants from the fund to qualified charities—whether that’s the same year, in five years, or decades later.

Benefits of Using a Donor-Advised Fund

1. Immediate Tax Deduction

DAFs allow you to “bunch” several years' worth of charitable donations into one high-income year, helping reduce your taxable income.

2. Tax-Free Growth

While the assets are in the fund, they can be invested and grow tax-free—potentially increasing the amount available for giving.

3. Avoid Capital Gains

Donating appreciated securities directly to a DAF allows you to avoid capital gains tax on those investments while still receiving a deduction for the full fair market value.

4. Streamlined Giving

You can manage all of your charitable contributions from one centralized platform, making it easier to track your philanthropy.

5. Legacy Planning

DAFs can be a great way to involve family in charitable giving or even create a multigenerational legacy of philanthropy.

When to Consider a Donor-Advised Fund

  • You’ve experienced a windfall (business sale, IPO, large bonus) and want to offset taxable income.
  • You regularly give to charity and want a more strategic, tax-efficient way to give.
  • You want to donate appreciated stock or non-cash assets.
  • You're approaching retirement and want to front-load giving while in a high-income bracket.
  • You want to leave a philanthropic legacy without setting up a private foundation.

Next Steps

Donor-Advised Funds are a powerful tool, but like any financial strategy, they should be implemented with thoughtful planning and alignment to your broader goals. If you’re considering incorporating charitable giving into your wealth strategy, we can help you evaluate whether a DAF makes sense in your situation.