Donor-Advised Funds: A Flexible Approach to Charitable Giving

Charitable giving is about more than supporting causes you care about.  With thoughtful planning, it can also be an opportunity to involve your family, create a lasting legacy, and make tax-efficient decisions about when and how you give.  One vehicle that has grown significantly in popularity is the donor-advised fund, commonly known as a DAF.

What Is a Donor-Advised Fund?

A donor-advised fund is a charitable giving account established through a sponsoring organization, such as a community foundation or charitable organization.  You contribute cash or other eligible assets to the account, receive a charitable income tax deduction when eligible, and then recommend grants to qualified charities over time.

Once you contribute assets, they belong to the sponsoring organization and are irrevocably dedicated to charitable purposes.  You retain advisory privileges over how the funds are invested and distributed, subject to the sponsor’s policies and approval.

Think of a DAF as a charitable account that allows you to separate the timing of your charitable contribution from the timing of your gifts to individual organizations.

Why Are DAFs Becoming More Popular?

One reason is the increased standard deduction.  Because taxpayers generally must itemize deductions to claim a deduction for charitable contributions, the higher standard deduction has made it more difficult for some households to receive an additional tax benefit from their annual charitable giving.

A strategy called “bunching” can help.  Rather than making similar charitable contributions every year, you might contribute several years’ worth of intended giving to a DAF in one year.  That larger contribution may allow you to itemize deductions in the funding year, while you recommend grants to charities over several subsequent years.

For example, a family that typically gives $20,000 annually might contribute $60,000 to a DAF in one year and distribute the funds to its preferred charities over the next three years.  Depending on the family’s other deductions and tax circumstances, this approach may provide a greater tax benefit than making the same contributions annually.

The charitable deduction generally occurs in the year the DAF is funded—not when the sponsoring organization later distributes grants to individual charities.  Deduction limits, substantiation requirements, and other tax rules still apply, so timing and asset selection matter.

A Way to Involve the Entire Family

DAFs can also help families approach charitable giving more intentionally.  Instead of distributing all charitable assets immediately, families can establish a giving strategy and recommend grants over time.

Parents may involve their children in researching charitable organizations, discussing community needs, and deciding which causes to support.  Successor advisers may also be designated, subject to the sponsoring organization’s rules, allowing the family’s charitable interests to continue across generations.

This structure provides a degree of oversight and pacing.  Families can evaluate organizations, discuss priorities, and recommend distributions when they believe the time is right.  However, the sponsoring organization retains ultimate legal control and can decline a recommendation that does not meet its requirements.

DAFs Versus Private Foundations

A private foundation can be an excellent option for families seeking formal governance and direct control over their philanthropic activities.  However, it comes with additional administrative responsibilities and regulatory requirements.

A DAF offers several important distinctions:

No mandatory annual payout.  DAFs are not subject to the federal minimum distribution requirement that generally applies to private foundations.  Families can recommend grants on a timeline that suits their charitable goals.

Favorable tax treatment.  DAF assets generally grow without federal income tax at the account level.  Private foundations, by contrast, are generally subject to an excise tax on net investment income.

Less Administration.  The sponsoring organization handles much of the administrative work, including recordkeeping, investment management, grant processing, and regulatory reporting.  Private foundations, by contrast, are responsible for managing these functions themselves, often requiring additional time, professional support, and expense.

Greater privacy.  Private foundations must file an annual Form 990-PF, which is publicly available and discloses information such as grants, foundation assets, and officers or directors.  A DAF does not require a separate public filing identifying the family’s individual account and grant history.

Privacy and Flexibility.  In today’s politically charged environment, privacy can be an important consideration in charitable giving.  DAFs allow families to choose whether their names are associated with grants or whether gifts are made anonymously.  This flexibility can be especially valuable when support for certain organizations may be viewed as a political statement, allowing families to support the causes they believe in while maintaining greater control over the visibility of their giving.

Important Considerations

DAFs are not right for every charitable objective.  Contributions are irrevocable, and donors cannot use the account to benefit themselves or their families.  DAFs also generally cannot receive qualified charitable distributions (QCDs) directly from an IRA during the donor’s lifetime.  However, a DAF may be named as a charitable beneficiary of an IRA at death, subject to the account and beneficiary-designation requirements.

Another consideration is that the sponsoring organization has final authority over grants.  While this is often a manageable trade-off, families should understand the sponsor’s policies before opening an account.  Some sponsors may permit assets to be granted to another DAF sponsor, potentially providing an alternative if the original provider is no longer a good fit, but such transfers are not guaranteed.

Making Charitable Giving Part of Your Plan

A DAF can be a useful tool for coordinating tax planning, family values, and long-term charitable goals.  For some families, it may complement a private foundation; for others, it may provide a simpler alternative.

The right approach depends on what you want to accomplish, the assets available to give, and how you envision your charitable legacy.  Working with your Composition Wealth Adviser, CPA, and estate-planning attorney can help ensure that your charitable strategy fits within your broader financial and estate plan.

Composition Wealth, LLC (“Composition Wealth”) is a registered investment adviser. Advisory services are offered only to clients or prospective clients where Composition Wealth and its representatives are properly licensed or exempt from licensure. This communication is for general informational purposes only and should not be considered investment, financial, tax, or legal advice. It should not be treated as a solicitation to buy or sell securities and does not consider individual investment objectives, strategies, tax status, or horizon. Please consult your own tax, legal and accounting advisors before making any related decisions.