Creating Donor-Advised Fund Investment Policies

Why a written investment policy matters

A formal donor-advised fund (DAF) investment policy converts your charitable intentions into executable investment and governance rules. It reduces ambiguity with your sponsoring organization, clarifies how assets will be stewarded for future grantmaking, and creates objective criteria for evaluating performance and fees. In my practice working with families and philanthropists, funds with clear policies avoid most of the common frictions that arise when markets shift or when a new generation joins grantmaking decisions.

Authoritative guidance on donor-advised funds from the IRS and philanthropy organizations underscores the importance of governing documents and transparency—see the IRS overview on DAFs and the Council on Foundations primer for background and compliance considerations (IRS, 2025; Council on Foundations, 2024).

• IRS: https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds
• Council on Foundations: https://www.cof.org/donor-advised-funds

Core components of an effective DAF investment policy

A practical policy typically includes these sections. Use clear, specific language rather than general statements.

1. Purpose and objectives

• State the philanthropic purpose of the fund (e.g., maximize grantmaking capacity, intergenerational family giving, impact investing). Specify short-, medium-, and long-term financial objectives such as growth, income, or capital preservation.

1. Governance and roles

• Identify who may recommend investments and grants (donor, successor advisors, investment committee) and who has final authority (the sponsoring organization retains legal control). Document meeting cadence, reporting requirements, and escalation steps for conflicts of interest.

1. Time horizon and spending expectations

• Define an expected time horizon (perpetual vs. finite) and whether the policy prioritizes annual distributions or long-term growth to build endowment-like capacity.

1. Risk tolerance and target asset allocation

• Provide risk parameters (volatility targets, maximum drawdown, asset allocation ranges). For example: equities 50–70%, fixed income 20–40%, alternatives 0–15%. Include liquidity minimums to support grantmaking (e.g., maintain 3–6 months of expected grants in cash or cash equivalents).

1. Acceptable and prohibited investments

• List permitted asset types (public equities, municipal bonds, private equity, real assets, ESG/impact strategies) and clearly identify prohibited holdings (e.g., direct ownership of operating businesses if disallowed by sponsor). Address closely-held stock valuation and substantiation processes for non-public gifts.

1. ESG and impact criteria (if applicable)

• Define how environmental, social, and governance (ESG) factors or impact objectives are integrated—screening, positive tilts, or dedicated impact sub-allocations—and describe measurement/verification standards.

1. Rebalancing and trading rules

• Set thresholds for rebalancing (e.g., rebalance when allocation drifts ±5% from target) and specify who can authorize trades and the time frame for rebalancing after large gifts or market events.

1. Fees, costs, and tax considerations

• Require transparent reporting of sponsoring organization fees, underlying manager fees, and transaction costs. Include expectations for net-of-fee performance and how fees are reviewed.

1. Reporting, benchmarking, and review cadence

• Specify performance benchmarks for each asset class (e.g., S&P 500 for U.S. large-cap equities), reporting frequency (quarterly), and a formal policy review schedule (annually or upon material change).

1. Succession, amendment, and termination

• Provide instructions for successor advisors, how the policy may be amended, and dissolution rules if the donor or family no longer wishes to continue the DAF.

Practical drafting tips and sample language

• Keep the document concise (2–6 pages) and use appendices for detailed allocations, watchlists, or permitted manager lists.
• Use objective metrics where possible (percent ranges, volatility limits, exact rebalancing triggers) so compliance is measurable.

Sample policy excerpt (adapt to sponsor requirements):

“Purpose: The Fund’s primary purpose is to support charitable grants to environmental organizations consistent with donor intent. The investment objective is long-term growth of principal with moderate volatility, targeting a 5% real annualized return over rolling ten-year periods.”

“Asset Allocation: Target Allocation — Equities 60%, Fixed Income 30%, Alternatives 10%. Tactical ranges: Equities 50–70%; Fixed Income 20–40%; Alternatives 0–15%. Rebalance when allocations exceed target ranges by more than 5 percentage points.”

“Liquidity: Maintain a minimum of 4% of fund assets in cash or cash equivalents to meet anticipated grant recommendations for the next 12 months.”

“ESG/Impact: Up to 25% of the equities allocation may be directed to strategies that screen for sustainability or direct green investments, provided managers report annual impact metrics.”

Common design decisions and trade-offs

• Growth vs. current grantmaking: Prioritizing growth supports larger future grants but limits near-term distributions. A hybrid policy can allocate a stable portion for current grants and a growth sleeve for long-term capital appreciation.
• Active vs. passive management: Active managers can add value but increase fees. A typical approach is a core-satellite model: passive core for broad market exposure and active satellites for alpha or impact.
• ESG integration: If impact is a priority, quantify expectations (e.g., percentage allocation to impact strategies, required KPIs) to avoid vague commitments.

Operational considerations and compliance

• Sponsoring organization rules: DAF sponsors (community foundations, commercial sponsors, national charities) set their own investment menus and legal terms. Confirm the sponsor’s policies before drafting and include a clause acknowledging sponsor authority.
• Valuation and gift acceptance: Non-public gifts require valuation methodologies and possibly third-party appraisals. Include procedures for accepting illiquid gifts and for managing post-acceptance liquidity events.
• Taxes and IRS rules: While donors receive immediate tax benefits upon contribution, the sponsor controls distributions. Investment policies should acknowledge that tax deductibility is governed by IRS rules—consult IRS materials and a tax advisor for limits and substantiation (IRS, 2025).

Monitoring performance and governance in practice

• Use rolling multi-year time horizons (3-, 5-, 10-year) to evaluate performance against benchmarks.
• Set an investment committee (even an informal one) with clear charters and documented minutes. Regular reviews should cover investment performance, fee levels, and adherence to ESG or impact goals.
• In my experience advising families, documenting a simple decision tree for grant approvals and investment changes reduces conflict when multiple advisors are involved.

Fees and cost management

Fees compound and can materially reduce grantmaking capacity over decades. Require annual disclosure of all fees, and consider negotiation points: lower platform fees for larger balances, using cheaper index funds for core exposure, and capping external manager fees in the policy.

Examples and templates to adapt

• Tactical allocations for donor goals:

• Conservative (for near-term giving): Equities 30%, Fixed Income 60%, Cash/LCM 10%

• Balanced (growth + grants): Equities 55%, Fixed Income 35%, Alternatives 10%

• Growth/Endowment-style: Equities 70%, Fixed Income 20%, Alternatives 10%

• Rebalancing rule: Rebalance annually, or when allocation drifts more than 5% from target.

Red flags and common mistakes to avoid

• No written policy: Casual approaches create confusion during market stress or family transitions.
• Overlooking sponsor terms: Some sponsors forbid private equity or require particular custodians; check before promising specific investments.
• Ignoring fees and taxes: High fees or poor tax planning can erode philanthropic impact—build net-of-fee targets into the policy.
• Vague ESG language: Without measurable KPIs, ESG aims are difficult to enforce.

Checklist to finalize the policy (one-page summary)

• [ ] Clear purpose and time horizon
• [ ] Defined asset allocation with ranges
• [ ] Liquidity minimums tied to expected grantmaking
• [ ] Rebalancing rules and trading authority
• [ ] Fee disclosure and review process
• [ ] ESG/impact criteria (if used) with KPIs
• [ ] Succession and amendment language
• [ ] Annual review schedule

Where to get help and additional reading

Work with a fee-only financial advisor who understands charitable vehicles and an attorney or tax advisor for deductibility and legal language. Sponsor-specific rules will often dictate what is practical, so coordinate drafting with the sponsoring organization.

Further reading and resources:

• Donor-Advised Funds 2.0: How to Use DAFs Strategically — FinHelp glossary article: https://finhelp.io/glossary/donor-advised-funds-2-0-how-to-use-dafs-strategically/
• Optimizing Donor-Advised Funds for Tax-Efficient Giving — FinHelp glossary article: https://finhelp.io/glossary/optimizing-donor-advised-funds-for-tax-efficient-giving/
• Donor-Advised Fund Succession Planning — FinHelp glossary article: https://finhelp.io/glossary/donor-advised-fund-succession-planning/
• IRS: Donor-Advised Funds overview: https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds
• Council on Foundations: Donor-Advised Fund resources: https://www.cof.org/donor-advised-funds
• National Philanthropic Trust: Practical DAF guides: https://www.nptrust.org/daf/

Professional disclaimer

This article is educational and reflects common best practices as of 2025. It is not legal, tax, or investment advice. Donors should consult their sponsoring organization, a tax professional, and an investment advisor to tailor a policy to their legal circumstances and philanthropic goals.