How do donor-advised funds (DAFs) work and who should use them?

Donor-advised funds (DAFs) are a popular, flexible vehicle for charitable giving. You give assets to a sponsoring organization (for example, a community foundation or a financial-services sponsor), receive an immediate income tax deduction for the donation, and advise how and when the sponsoring organization should distribute grants to IRS-qualified charities. The sponsoring organization legally controls the funds, but in practice it follows donor recommendations unless a recommended grant would violate tax law or the sponsor’s policies (IRS guidance on DAFs).

In my 15 years advising clients on charitable strategies, I’ve seen DAFs help people: bunch charitable deductions into one year, donate appreciated assets to avoid capital gains, involve family members in giving, and centralize ongoing grantmaking without the administrative burden of a private foundation.

Authoritative sources: IRS — Donor-Advised Funds (https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds) and National Philanthropic Trust — DAF Report (NPT, 2022).

Quick facts you should know

  • Contributions to a DAF are irrevocable gifts to a public charity and qualify for an immediate federal income tax deduction subject to AGI limits.
  • Gifts commonly accepted: cash, publicly traded securities, mutual funds, and — depending on the sponsor — closely held stock, real estate, or other complex assets (subject to sponsor approval and appraisal rules).
  • DAF assets can be invested and grow tax-free inside the account.
  • Grants from a DAF must go to qualified public charities; grants that provide a material benefit to the donor or to political organizations are prohibited.
  • There is no federal required annual payout rate for DAFs (unlike private foundations), though sponsoring organizations set account minimums, fees, and grant policies.

How to set up a DAF (step-by-step)

  1. Pick a sponsoring organization. Options include national sponsors (e.g., Fidelity Charitable, Schwab Charitable), community foundations, or other public charities.
  2. Open an account and satisfy the sponsor’s minimum initial deposit and account agreements.
  3. Fund the DAF with acceptable assets. For appreciated securities held over one year, donors typically get a deduction for fair market value and avoid capital gains tax (subject to IRS limits).
  4. Choose investment options offered by the sponsor; any investment growth is tax-exempt.
  5. Recommend grants to qualified charities over time; the sponsor issues grants and records charitable distributions.

Pros — why donors choose DAFs

  • Immediate tax benefit: You can claim a charitable deduction in the year you fund the DAF (subject to AGI limits), even if you distribute grants later (IRS).
  • Tax-efficient giving of appreciated assets: Donating long-term appreciated stock or other securities generally lets you avoid capital gains tax while deducting the fair market value.
  • Simpler and cheaper than a private foundation: DAFs require less paperwork, no separate tax return for the donor, and typically lower setup and ongoing costs.
  • Flexibility and privacy: You can recommend grants on your timetable, involve family members as advisory participants, and — if you wish — give anonymously.
  • Professional administration and pooled investments: Sponsors offer multiple investment pools, due diligence on recipient charities, and grant processing.

Cons — limitations and risks to watch for

  • Loss of legal control: Donations to a DAF are irrevocable gifts to the sponsoring charity; the donor’s recommendations are advisory, not binding.
  • Fees and investment limitations: Sponsors charge administrative and investment fees; investment choices are set by the sponsor.
  • No direct grants to individuals or most private non-charitable uses: Grants must go to IRS-qualified public charities, so DAFs are not suitable if you want to fund scholarships directly to named individuals or offer personal loans.
  • Transparency and timing concerns: Because there’s no federal payout requirement, assets can remain in DAFs for long periods before being granted, which some critics argue reduces the immediate impact of charitable dollars.

Tax rules and practical limits (concise, as of 2025)

  • Deduction timing: You receive the charitable deduction in the tax year you make a completed gift to the sponsoring organization (not when the sponsoring org later distributes the funds).
  • Deduction limits: Federal income tax deduction limits depend on the type of gift and your adjusted gross income (AGI). For example, deductions for cash gifts to public charities are subject to a percentage-of-AGI limit; deductions for donated long-term appreciated assets have different percentage limits. These percentages and special rules can change; verify current limits with the IRS or your tax advisor before planning large gifts.
  • Reporting: Gifts of non-cash property may require Form 8283 and, for large gifts of certain property types, a qualified appraisal.

Note: IRS guidance remains the primary authority. See IRS — Donor-Advised Funds for up-to-date rules and examples.

Common use cases and real-world examples

  • Bunching strategy: If you plan to itemize but face the standard deduction barrier in most years, you can “bunch” multiple years’ worth of planned giving into a single year by funding a DAF now and recommending grants over several years.

  • Giving appreciated stock: I’ve worked with clients who funded DAFs with appreciated stock after a liquidity event. One client contributed stock worth $100,000 (long-term) to a DAF, took a fair-market-value deduction, avoided capital gains tax, and then recommended grants annually to the community college that mattered to his family.

  • Family philanthropy: DAFs are a practical tool to involve children in grantmaking — the donor creates the account, names successor advisors, and uses the fund as a teaching tool.

  • Post-sale charitable strategy: Business owners frequently use DAFs immediately after a sale to capture large deductions in a high-income year and then pace grants to charities over time.

When a private foundation or other vehicle can make more sense

Consider alternatives if you need: direct control over investments and grants, the ability to hire staff, or to make grants to individuals on a named basis. Private foundations offer greater control but come with higher startup costs, regulatory reporting (Form 990-PF), self-dealing rules, and mandatory minimum distributions.

For hybrid solutions and tax-efficient alternatives to DAFs, see our related guides: Tax-Efficient Charitable Giving Strategies and Using Appreciated Stock for Immediate Charitable Impact.

Practical tips and best practices

  • Compare sponsors: Look at administrative fees, investment options and past performance, grant processing speed, and minimums.
  • Document everything: Keep donation receipts, brokerage transfer confirmations, and any appraisal paperwork for non-public assets.
  • Coordinate with employer matching: Some employers will match gifts made through a DAF; check with your HR or payroll team.
  • Name successor advisors: If you want legacy control, name successors or provide distribution instructions in the account paperwork.

Common mistakes and red flags

  • Assuming you retain control: Once you donate to a DAF the gift is irrevocable. Donors sometimes mistakenly behave as if the funds remain privately controlled.
  • Donating disallowed assets without sponsor approval: Not all sponsors accept real estate, cryptocurrency, or private-company stock. Confirm acceptance and due-diligence requirements first.
  • Overlooking fees and tax paperwork: Administrative fees, custodial fees, and appraisal costs can reduce net charitable impact.

FAQs (short answers)

Q: Can I get a tax deduction now and recommend grants later?
A: Yes — that’s the central feature of DAFs. The tax deduction is taken in the year you fund the DAF (subject to limits); grants may be recommended later.

Q: Can a DAF make political donations or grants to individuals?
A: No. DAF grants cannot support political campaign activity, and they generally cannot grant directly to individuals (with limited exceptions typically handled through established charitable entities).

Q: Is there an annual payout requirement for DAFs?
A: No federal minimum payout is currently imposed on DAFs. Sponsoring organizations may have their own policies.

Bottom line and next steps

Donor-advised funds are a powerful, tax-efficient, and user-friendly option for many donors who want flexibility without the complexity of a private foundation. They work especially well for donating appreciated assets, executing bunching strategies, or creating a multi-generational giving plan.

If you’re considering a DAF for a sizable gift, consult a qualified tax advisor or estate planner to confirm current IRS deduction limits, reporting rules, and the sponsor’s policies. This article is educational and not personalized tax or legal advice.

Sources and further reading

Disclaimer: This content is educational only and does not constitute tax, legal, or financial advice. Consult a qualified professional about your situation.