When people hear the words charitable estate planning, they often assume we are talking about billionaires establishing private foundations, naming buildings after themselves, or leaving millions of dollars to charity at death.
But sophisticated charitable planning is not reserved for the ultra-wealthy.
One of the most useful—and comparatively simple—charitable planning tools available today is the Donor-Advised Fund, commonly called a DAF.
A DAF can allow someone to make a charitable contribution today, potentially receive an income-tax deduction for the year of the contribution, invest the assets for future charitable use, and decide over time which charities should ultimately receive grants.
It can also provide families with something less tangible but equally valuable: a structure for making philanthropy part of the family’s legacy.
So what exactly is a donor-advised fund, how does it work, and when should it be considered as part of an estate plan?
What Is a Donor-Advised Fund?
Think of a donor-advised fund as a charitable investment account.
Technically, the IRS defines a DAF as a separately identified fund or account maintained by a qualifying Section 501(c)(3) sponsoring organization. A donor contributes assets to the account, and the sponsoring organization obtains legal control over those assets. The donor generally retains advisory privileges concerning investments and future distributions.
That last part is critical.
You don’t technically still own the money.
If you contribute $100,000 to a DAF, you cannot change your mind next year and take the $100,000 back to renovate your kitchen.
The gift is irrevocable.
The assets have been committed to charitable purposes.
But unlike making a $100,000 contribution directly to one charity, you generally don’t have to decide immediately which charities will ultimately receive all of the money.
That is the attraction.
You can separate two decisions:
When do I want to make the charitable contribution?
from:
Which charities do I ultimately want to support?
Those decisions do not necessarily have to occur at the same time.
A Simple Example
Suppose Susan normally gives approximately $20,000 per year to several charities.
This year, however, is unusual.
Susan sells a business and recognizes substantially more income than she ordinarily receives.
She knows she wants to devote $100,000 to charity over the next several years, but she isn’t ready to decide exactly which organizations should receive it.
Rather than writing $100,000 of checks immediately to different organizations, Susan could contribute $100,000 to a donor-advised fund.
Subject to the applicable charitable-deduction rules, she may qualify for a charitable deduction associated with the contribution in the year she funds the DAF.
The money can then be invested inside the DAF.
Over the following years, Susan can recommend grants to eligible charities.
For example:
Year 1: $15,000
Year 2: $25,000
Year 3: $20,000
Year 4: $20,000
Year 5: $20,000
The important point is that the potential charitable deduction generally relates to the contribution to the DAF, not the later grants from the DAF to individual charities.
That makes a DAF particularly interesting during unusually high-income years.
Why Would Someone Want to “Bunch” Charitable Contributions?
The federal income-tax deduction for charitable contributions depends upon numerous factors, including whether the taxpayer itemizes, the type of asset contributed, the recipient organization, adjusted gross income and other applicable limitations.
Beginning with tax year 2026, federal law also permits non-itemizers to deduct limited amounts of certain qualifying cash charitable contributions—up to $1,000 for an individual and $2,000 for a married couple filing jointly—but the much larger charitable deductions relevant to substantial DAF planning generally involve itemized deductions.
That can make bunching attractive.
Imagine a family that intends to give $25,000 per year to charity for the next four years.
Instead of contributing:
$25,000 in 2026
$25,000 in 2027
$25,000 in 2028
$25,000 in 2029
the family might contribute $100,000 to a DAF in a particularly advantageous tax year.
The DAF could then make grants to charities over several years.
Whether that strategy produces a better tax result depends upon the family’s particular circumstances, but the DAF creates the flexibility to explore it.
Cash Isn’t the Only Thing You Can Give
This is where donor-advised funds can become especially interesting.
Depending upon the sponsoring organization and its policies, a DAF may accept assets other than cash.
That can potentially include appreciated publicly traded securities and, with certain sponsors, more complicated assets.
Why does that matter?
Consider someone who purchased stock for $20,000 years ago that is now worth $100,000.
If the owner sells the stock, there may be capital-gains tax consequences.
If instead the owner makes an eligible charitable contribution of the appreciated stock, the charitable-contribution rules may produce a substantially different result.
The IRS explains that contributions of property to qualified organizations may generally be deductible based on fair market value, although special limitations and adjustments apply, particularly to appreciated property.
This is why charitable planning should often occur before highly appreciated assets are sold.
Writing a check after a taxable sale and donating the asset before the sale are not necessarily tax-equivalent transactions.
The Deduction Is Not Unlimited
A common misconception is:
“If I put it in a DAF, I can deduct all of it.”
Not necessarily.
Charitable deductions are subject to percentage limitations based upon adjusted gross income, and those limits vary according to the type of contribution and recipient.
Current IRS guidance explains that charitable deductions can be subject to 60%, 50%, 30%, or 20% of AGI limitations depending upon the circumstances.
There are also substantiation, valuation and documentation requirements.
For a deductible contribution to a DAF specifically, the donor generally needs a contemporaneous written acknowledgment from the sponsoring organization confirming that the sponsor has exclusive legal control over the contributed assets.
For substantial gifts—particularly gifts involving appreciated property—the transaction should be coordinated with the donor’s attorney, CPA and financial adviser.
You Advise. You Don’t Control.
The word “advised” in Donor-Advised Fund matters.
Once assets are contributed, the sponsoring organization legally controls them.
The donor retains advisory privileges.
In practical terms, the donor can typically recommend that the sponsoring organization make grants to particular qualifying charities.
But this isn’t your personal checking account with a charitable label attached.
The distinction explains why a DAF can potentially generate an immediate charitable deduction even though the money hasn’t necessarily reached the ultimate operating charity yet: the donor has already irrevocably transferred the property to the charitable sponsoring organization.
The Money Can Potentially Grow
Another attractive feature is the ability to invest DAF assets.
Depending upon the sponsor, donors may be able to recommend an investment allocation from available investment options.
Suppose you contribute $250,000.
Instead of distributing all $250,000 immediately, the assets remain invested.
If the account grows to $325,000 over time, there may now be $325,000 available for charitable grants.
Of course, investments can decline as well as appreciate. A DAF isn’t immune from investment risk.
But for families envisioning decades of charitable giving, investment growth can potentially magnify the impact of the original contribution.
A DAF Can Be Part of an Estate Plan
Donor-advised funds become even more interesting when viewed as legacy-planning vehicles rather than merely income-tax strategies.
Suppose Mom and Dad establish a DAF during their lifetimes.
Every year, the family sits down around Thanksgiving and discusses which organizations should receive grants.
One child wants to support an animal shelter.
Another wants to support medical research.
Mom supports a food bank.
Dad supports scholarships.
Suddenly the DAF isn’t merely an account.
It has become a family tradition.
Parents can use charitable planning as an opportunity to teach children about generosity, financial responsibility and community involvement.
Depending upon the sponsoring organization’s policies, donors may also be able to designate successor advisors who can continue recommending charitable grants after the original donors die.
That can allow the family’s philanthropic mission to continue into another generation.
What Happens to the DAF When You Die?
This needs to be addressed when establishing the account.
The available options depend upon the sponsoring organization.
A donor might designate one or more successors to advise the fund after death.
Alternatively, the donor may provide that the remaining DAF assets ultimately be distributed among designated charities.
This creates interesting estate-planning possibilities.
Someone could establish a DAF during life, contribute periodically, involve children in charitable decisions, and then authorize the children to continue that philanthropic activity after death.
Or the estate plan itself may provide for charitable transfers in coordination with a DAF.
The important point is to coordinate the DAF beneficiary/succession provisions with the donor’s will, trust and overall estate plan rather than treating the account as something completely separate.
DAF vs. Private Foundation
People who want a formal charitable legacy often assume they need a private foundation.
Sometimes they do.
But a private foundation generally involves substantially more administration, compliance, tax filings, governance and expense.
A DAF can offer some of the experience people associate with a family foundation without requiring the family to establish and operate an entirely separate charitable organization.
The sponsoring charity handles much of the administration.
That doesn’t make DAFs and private foundations interchangeable.
A private foundation may offer considerably greater control and may be appropriate when the donor wants a sophisticated charitable organization with employees, direct charitable programs, a board, specific grantmaking activities or other capabilities.
But if the objective is essentially:
“I want to set aside money for charity, invest it, involve my family, and make grants over time,”
a DAF may deserve consideration before creating a private foundation.
You Cannot Use the DAF as Your Personal Wallet
There are strict limits on what DAF assets can do.
The IRS warns against arrangements that use purported DAFs to generate questionable deductions or provide improper economic benefits to donors or their families.
The basic rule is simple:
Charitable money needs to remain charitable money.
A donor, donor advisor, family member, or certain related entities cannot simply receive grants, loans, compensation or similar payments from the DAF. The tax rules impose potentially serious consequences on improper transactions.
Similarly, a DAF distribution that provides more than an incidental benefit to a donor, donor advisor or related person can create tax problems.
So don’t think of a DAF as a clever way to get a tax deduction while keeping access to the money.
You don’t.
The charitable commitment is real.
Can I Use My DAF to Buy a Table at a Charity Gala?
This is exactly the type of situation where donors need to be careful.
Charitable events frequently provide something of value in return for payment—dinner, entertainment, tickets, admission or another benefit.
Ordinary charitable-contribution rules generally permit a deduction only for the portion of a payment exceeding the fair market value of benefits received.
DAFs present additional restrictions because the donor cannot use DAF assets in a manner that provides an impermissible personal benefit.
Don’t assume that because the recipient is a charity, every payment from a DAF is permissible.
Ask the sponsoring organization before committing DAF assets to tickets, memberships, galas, auctions or other arrangements where the donor receives something in return.
DAFs Can Also Simplify Recordkeeping
There is another benefit that isn’t nearly as exciting as tax planning but can be surprisingly useful.
Recordkeeping.
A family that supports 25 charities every year may otherwise receive 25 acknowledgments, receipts and year-end statements.
With a DAF, the family makes the charitable contribution to the sponsoring organization and then recommends grants from the fund.
That can significantly simplify charitable administration.
The DAF can effectively become the family’s centralized charitable-giving hub.
Who Should Consider a Donor-Advised Fund?
A DAF may be worth exploring if you:
- regularly make charitable contributions;
- expect an unusually high-income year;
- are selling a business;
- own highly appreciated investments;
- want to bunch several years of charitable giving;
- want to make a charitable contribution now but choose charities later;
- want children involved in family philanthropy;
- are considering a private foundation but want something simpler;
- want charitable giving integrated into your estate plan; or
- want to establish a long-term philanthropic legacy.
It isn’t limited to millionaires.
And it doesn’t require you to give away your entire estate.
Charitable Planning Should Be Intentional
A good estate plan answers more than:
Who gets my money when I die?
It should also ask:
What do I want my money to accomplish?
For some families, the answer is entirely about children and grandchildren.
For others, it includes churches, schools, animal organizations, medical research, community groups, scholarships, environmental organizations or other causes that have mattered throughout their lives.
A donor-advised fund provides a way to begin that legacy while you are still here to participate in it.
You can contribute.
You can recommend grants.
You can involve your children.
You can watch organizations put the money to work.
And you can potentially structure the fund so that charitable giving continues after you are gone.
That may be the most compelling feature of all.
Estate planning is normally about preparing for a world in which you are no longer here.
A donor-advised fund gives you the opportunity to start building part of that legacy today.
This article is provided for general informational and educational purposes only and does not constitute legal, tax, investment, or financial advice. The tax treatment of charitable contributions depends upon the donor, asset, recipient organization, applicable law, and other circumstances. Donors should consult their attorney, CPA, and financial adviser before implementing significant charitable-giving strategies.
