Donor-Advised Funds (DAFs) offer a flexible way to support causes that you care about while complementing your overarching estate planning goals. Incorporating a DAF is a strategic way to engage in charitable giving, maximize tax benefits, and leave a lasting legacy.

An Expanded Overview of Donor-Advised Funds

A DAF is a versatile philanthropic tool that functions as a dedicated charitable giving account. DAFs are established and operated by a sponsoring organization. The fundamental concept is that a donor makes a contribution to the fund and, in return, retains the privilege to make non-binding recommendations on how the assets should be distributed to eligible charitable organizations over time. While the sponsoring organization maintains legal control and, ultimately, discretion over all grants, in practice, they will honor the donor’s recommendations, provided that the recipient is a verified public charity.

The legal definition of a DAF is codified in the Internal Revenue Code (§4966). It specifies that a DAF is a fund or account that is:

• Separately identified by reference to contributions of a donor or donors.
• Owned and controlled by a sponsoring organization (a 501(c)(3) public charity).
• Managed with the understanding that the donor (or a designee) has, or reasonably expects to have, advisory privileges regarding the distribution of funds or the investment of assets held in the account.

It is important to note a key exception: an account is generally not classified as a DAF if it makes distributions only to a single, identified public charity or governmental entity, or if its advisory role is limited to recommending grants for specific individuals to receive travel, study, or similar awards.

Establishing and Funding a DAF

The process of establishing a DAF is typically straightforward, centering primarily on the selection of a sponsoring organization. Numerous major financial institutions (such as Charles Schwab, Fidelity, and Vanguard) and community foundations offer robust DAF programs. The setup involves three key steps:

1. Selecting a Sponsor: Choose a sponsoring organization whose mission, fee structure, and grant-making process align with your philanthropic goals.
2. Funding the Account: Make an irrevocable contribution to your newly created DAF. Sponsoring organizations usually require a minimum initial contribution, which can range from $5,000 to $100,000 or more, depending on the sponsor.
3. Recommending Grants: You can begin recommending grants to qualified public charities at any time after the account is funded.

From a tax perspective, DAFs are most advantageous when funded with appreciated long-term assets, such as stocks, mutual funds, or ETFs held for more than one year. By donating these assets directly, you can generally claim an income tax deduction for the full fair market value of the asset on the date of contribution while simultaneously avoiding the capital gains tax that would have been due if you sold the asset.  A significant benefit is that the tax deduction is available in the year you fund the DAF even though the actual distributions to your chosen charities may be made over many subsequent years.

Tax Deduction Limitations and Grant Making Guidelines

Contributions to a DAF are subject to general charitable deduction limits, which vary based on the type of asset donated and the donor’s Adjusted Gross Income (AGI). For cash contributions, the deduction is typically limited to 60% of AGI. For contributions of appreciated non-cash assets, the limit is generally 30% of AGI. The Big Beautiful Bill establishes for 2026 and beyond a 0.5% of AGI floor for deductibility and reduces the deductible amount for high-income taxpayers by requiring certain itemized deductions to be reduced.

Regarding distributions from the DAF, grants are permissible to a wide range of recipients, including:

• Any qualified U.S. public charity (e.g., churches, schools, food banks) or private operating foundation.
• The DAF’s own sponsoring organization.
• Another DAF which facilitates easy transfers.
• Foreign charities or non-charities, provided that the sponsoring organization exercises “expenditure responsibility,” which is a due diligence process to ensure that the funds are used exclusively for charitable purposes.

On the flip, certain grants are strictly impermissible. A DAF cannot make distributions:

• To individuals, even for charitable purposes such as a scholarship or an artist’s stipend; these kinds of grants are to be handled through a separate program.
• To organizations that cannot verify their status as eligible public charities.
• For any non-charitable purpose, such as purchasing event tickets, paying for things like membership dues, or making political contributions.

Qualified Charitable Distributions

For individuals who have hit their beginning date for required minimum distributions (RMD), a Qualified Charitable Distribution (QCD) allows individuals to transfer up to $108,000 (as of 2025 and indexed for inflation) directly from a traditional IRA to a qualified charity.  This strategy is uniquely beneficial as it reduces IRA balances without increasing AGI. Since QCDs are not included in AGI, they do not count toward the charitable deduction limits and can help retirees avoid income-based surcharges on Medicare premiums and keep retirees at lower income tax brackets. This makes the QCD a powerful tool for charitably inclined retirees to fulfill their philanthropic goals while managing their tax liability from RMDs.

While legislation has been proposed to allow for a QCD to a DAF, this is not currently allowed and would result in income to the donor.  Instead, a QCD must be transferred to a qualified charity to obtain the income exclusion.

Conclusion

In summary, a DAF is an excellent vehicle for donors seeking simplicity, cost-effectiveness, and administrative ease in their charitable giving. It offers significant privacy, as grants are made in the name of the DAF rather than the individual donor. The primary drawbacks are the sponsor’s ultimate legal control over the assets and the restrictions on permissible grant recipients. If you have questions about this, or other Estate Planning vehicles, the Estate Planning, Probate, and Private Wealth Services at Lasher is available to help.