A donor-advised fund (DAF) is a tax-advantaged charitable investment account, meaning its sole purpose is to support your charitable giving efforts. In a nutshell, you can contribute assets to the fund, receive an immediate tax deduction, and recommend grants over time to your favorite nonprofits.
Think of it almost as creating your own mini charitable foundation, just without the high costs or administrative burden. You retain advisory privileges over the fund, which enables you to suggest where the money should be granted. However, the fund itself is legally controlled and administered by a sponsoring organization.
DAFs enable you to streamline your charitable giving strategy while supporting as many charitable organizations as you’d like. With that in mind, let’s take a look at why you might want to consider a DAF and how to get started.
The contributions you make to your DAF are tax-deductible in the year the contributions are made, meaning you don’t have to wait for the DAF to grant donations to charity in order to enjoy the tax benefits.
Once assets are in the fund, they’ll continue to grow tax-free—making it a potentially appealing way to donate low-basis and highly appreciated stock. Because you aren’t selling the appreciated assets outright and collecting a profit, no capital gains tax is incurred.
There is no limit to how much you’re allowed to contribute to your DAF in a year. However, you are limited to how much you’re allowed to deduct. For cash donations, you can typically deduct up to 60 percent of your adjusted gross income (AGI). For donations of appreciated assets, like stock or real estate, the limit is generally 30 percent of AGI.1
A DAF can be particularly helpful for executing a “bunching” charitable giving strategy (combining multiple years’ worth of donations into one tax year). If you are pursuing charitable giving as part of your tax strategy, keep in mind that the rules have recently changed as a result of the One Big Beautiful Bill Act (OBBBA).
Now, taxpayers who opt for the standard deduction may deduct up to $1,000 ($2,000 per couple) in donations to qualifying charities. You can still deduct more if you choose to itemize, but your donations must exceed 0.5% of your AGI to qualify.2
Setting up a DAF is a relatively straightforward process, though it may vary slightly depending on the requirements of your sponsoring organization. Let’s take a closer look at each step.
The first step is deciding where you’d like to house your donor-advised fund. A DAF must be opened and managed by a 501(c)(3) organization (also called a sponsoring organization).
Here are a few examples of sponsoring organizations you can choose from:
Community foundations: These tend to be independent charitable foundations created to benefit a certain city or region (for example, the greater Philadelphia area).
National organizations: Many financial services providers operate charitable arms that offer DAF programs. You may already have brokerage accounts or IRAs with these institutions. If you’re familiar with their platform and interface already, it can certainly help make the process of establishing a DAF easier. Some larger institutions offer lower or zero minimum initial contribution requirements.
Single-issue organizations: Some nonprofits establish DAF programs to support specific missions, faith communities, or identities. If you want your giving tied closely to a single cause, a single-issue sponsoring organization may be a natural fit.
When opening the account, you’ll need to complete an application, decide on an initial contribution, and select an investment allocation for your fund. The sponsoring organization will likely offer a variety of investment pools, ranging from conservative fixed income funds to more aggressive growth strategies.
After opening the account, you’ll need to contribute the assets you’d like to grow and donate to the fund. One of the advantages of a DAF is its ability to accept different asset types.
For example, you can contribute:
As we mentioned before, sponsoring organizations may require a minimum initial contribution, though many larger institutions do not.
One important note: Once assets are transferred into your DAF, the gift is irrevocable. You can’t withdraw the money for personal use later. But remember, you can deduct the fair market value of the donation on your tax return for the year you make the contribution (as long as it meets the IRS’s criteria for charitable donations).
Once assets are transferred to the DAF, they’ll continue to grow, based on the investment strategy you selected. Most often, they’ll become part of a pooled fund overseen by professional investment managers.
Remember, investments held within a DAF grow tax-free. The longer you allow your assets to grow, the greater the pool of money you’ll have available to donate to charity. While you’re able to request grants to charity as soon as the account is established and funded, you may want to consider how your DAF can play a role in your long-term legacy plan.
As the account holder, you can recommend grants from your fund to IRS-qualified 501(c)(3) charities. The sponsoring organization then reviews and approves the grant. Typically, the sponsoring organization won’t have a problem with your request, as long as the charity meets IRS nonprofit guidelines. Grants can be made in one-time amounts or as recurring gifts.
One of the big advantages of a DAF is the flexibility it provides, both in determining when you donate and how much. You can start recommending grants right away or let the funds grow for years before making distributions. Some families enjoy establishing a DAF as part of their multigenerational wealth plan, which enables them to involve their children and grandchildren in the charitable giving process across decades.
In addition, DAFs can make it easier to donate complex assets directly to nonprofits, particularly smaller organizations that may not have the resources to process non-cash donations on their own. Rather than donate stock or property to the organization directly, you can donate it to the DAF and grant distributions to the organization when you’re ready.
Establishing a DAF is a relatively simple, cost-effective way to align your financial life with your philanthropic goals—all while unlocking some notable tax advantages.
If you’re interested in being more strategic with your giving, a donor-advised fund might be the right next step—especially if you’ve accumulated a significant amount of appreciated assets. As you decide whether a DAF is right for you, consider what your ongoing giving goals are and how to best execute them. You may find it helpful to speak with a financial advisor and tax professional as you weigh your options.