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Donor Advised Funds (DAFs) - An Attractive Charitable Planning Tool

Posted by Erin Patterson | Sep 08, 2022

Many of our clients express a desire to begin gifting to charities during their life.  Typically, in making these gifts, donors are seeking to benefit a charitable cause important to them, reduce their own taxable estates, and/or obtain tax benefits. While the techniques available to make charitable gifts are numerous, one of the most attractive options to consider is a Donor Advised Fund (DAF).  Here, we explain what a DAF is and the many attendant benefits.

What is a DAF?

A DAF is a private giving account established by an individual at any major financial institution (e.g., Fidelity, Charles Schwab, Vanguard, etc.).  It is extremely simple to set up and administer when compared to other types of charitable giving mechanisms such as private foundations, charitable trusts, etc.  Often, there are no start-up costs associated with establishing a DAF.

The individual donor can irrevocably contribute cash or other non-cash assets such as marketable securities to the account. Some financial institutions will have a minimum establishment or annual contribution requirement for the DAF, but with many financial institutions offering DAF services, the donor is free to select from the available options in light of their giving intent.

Periodically, the donor will recommend to the financial institution that donations be made to any number of charitable organizations recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code. Although technically it is a "recommendation" and not a command, most financial institutions will honor the donor's wishes, within reason.  Importantly, there is no deadline on when or how much of the account must be donated to charities.  The donor retains control over those decisions.  The donor may wish to benefit any number of charities, and the DAF provides flexibility as to which or how many charities should receive assets in any given year.  There is no minimum annual payout requirement.

DAF Benefits

In addition to the benefits described above, DAFs also include the following attractive benefits:

  • Legacy: DAFs are a useful tool to encourage family legacy through philanthropic grant-making without the administrative cost and management expense of a private foundation.  A donor can choose to have any remaining DAF assets distributed to named charities at the donor's death.  Alternatively, the donor could name a successor custodian for the DAF to make future donation decisions. For example, if the original DAF donor dies, he or she could name an adult child to take over grant-making decisions at their death, thereby providing another means of encouraging the family's philanthropic legacy to continue. 
  • Anonymity: The account created can be named anything the donor wishes.  Some donors may decide to include the family name in the account name or others may choose a less descriptive name for the account.  This aspect of the DAF gives the donor the flexibility to remain anonymous if they wish.
  • Tax Items: The donor receives an immediate charitable income tax deduction when a gift is made to the DAF.  For example, any contribution received by December 31, 2022 is eligible for a 2022 tax deduction. Under current law, the deduction allowed is up to a maximum of 60% of any cash donation to the DAF and 30% of any non-cash (e.g., marketable securities) donation. Donations exceeding the limits may be carried over for up to 5 years. Additionally, assets held in the DAF may be invested and therefore may grow over time, tax-free.  Additional benefits are obtained when non-cash assets which (1) have been held by the donor for more than one year and (2) have significantly appreciated, are donated, because the capital gains tax that the donor would otherwise be responsible for paying is eliminated entirely. Finally, there is no annual tax reporting obligation for a DAF.

Donor Advised Funds have grown tremendously in popularity in recent years and in light of their many benefits. Our attorneys are experienced at guiding clients through the various charitable giving options available in light of individual goals. Contact us today if you think a DAF could be right for you and your family.

About the Author

Erin Patterson

Founding Partner

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