A Donor Advised Fund (DAF) is a popular solution for charitably inclined individuals.
The three main components of a DAF are contributing, investing, and granting.
DAF’s are popular for a broad range of charitably inclined individuals, especially those in high income tax brackets.
The key benefits of a DAF include income tax benefits, flexibility and control, portfolio construction and estate planning.
What is a Donor Advised Fund (DAF)?
A DAF is a tax-efficient and simple investment solution set up by an individual, family or organization for charitable intentions. A DAF allows for an immediate tax deduction and the ability to support your desired charities over your lifetime.
DAF’s have become popular in recent years. According to the National Philanthropic Trust, there is now over $250 billion in DAF assets in 2023 versus $54 billion in 2023. The average DAF account size is roughly $141,000 spread across over 1,782,000 DAF accounts.
Incorporating a DAF into your financial plan can create tax, investment, estate planning and charitable benefits.
How Does a DAF Work?
A DAF is simple and cost effective to set up and operate. The three main components for a DAF are as follows:
Contributing: Once a DAF is opened, the donor gifts assets into the DAF which is held by a public charity called a sponsoring organization. Assets that are typically used to fund a DAF include:
Cash
Public Securities
Real Estate
Private Business Interests
Cryptocurrency
Gifts into a DAF are held outside the donor’s estate, reducing potential future estate tax liability. It is important to note that gifts to a DAF are irrevocable and cannot be changed.
Investing: Assets within a DAF can be invested to meet future charitable goals of the DAF. There are many factors to consider when developing an investment program for a DAF including:
Time Horizon
Return Objective
Risk Tolerance
Liquidity
Unique Circumstances
Granting: The donor provides recommendations to the sponsoring organization for specific grants to be made to eligible charities. Once the sponsoring organization reviews and approves the grant recommendation in accordance with IRS regulations, the sponsoring organization disburses a grant to the desired charity.
A DAF can support any US-based 501(c)(3) public charity in good standing with the IRS.
Who Should Consider a DAF?
DAFs are suitable for a wide range of donors ranging from those just starting off in charity to experienced philanthropists.
Individuals who are in a favorable position to open and fund a DAF include those that are:
Charitably inclined
High income earners
Looking to diversify from concentrated and/or low-cost basis stock
Interested in simplifying gift giving
Seeking to reduce their taxable estate
What are the Benefits of a DAF?
Funding a DAF offers a broad range of benefits to the donor, which speaks to the popularity DAF’s have received.
Income Tax Benefits
The donor will receive an immediate federal tax deduction after gifting assets to a DAF. The maximum tax deduction received depends on the type of asset that is gifted.
Any portion of the tax deduction that a donor does not utilize in the year the gift is made can be carried forward for up to five subsequent tax years, allowing for future tax deductions.
For high income earners, the recently signed One Big Beautiful Bill Act (OBBBA) caps the tax benefit of itemized charitable deductions at 35%, even for those in the 37% marginal tax bracket. However, this change does not go into effect until 2026. 2025 contributions are still deducted at the 37% federal tax rate for high income earners.
Flexibility and Control
A DAF allows the donor to determine the timing of their contributions as well as when the grants are made to eligible charities. This allows for tax-free investment growth within the DAF once a contribution is made.
Furthermore, a donor can support many different charitable causes as long as the charity is structured as a US-based 501(c)(3) organization. In addition, the donor has the ability to specify the grant’s purpose (i.e. in honor of someone) and has the optionality to be recognized or to remain anonymous.
Lastly, a DAF does not have a required annual distribution, providing the donor with more flexibility than a private foundation.
It is important to note that a donor cannot personally benefit from a DAF grant.
Portfolio Construction
Funding a DAF with low-cost basis stock is an attractive way to reduce equity exposure in a tax favorable manner.
Additionally, DAF contributions are a popular way to reduce single stock concentration risk and to eliminate taxable unrealized capital gains.
Gifting securities to a DAF after a period of substantial market appreciation is timely and advantageous.
Estate Planning
Utilizing a DAF is an attractive estate planning tool as the contributions to a DAF are outside of the donor’s estate. By reducing the taxable estate, the donor’s estate may have a lower state and or federal estate tax liability.
For those in restrictive estate tax states such as, but not limited to the following states,
gifting to a DAF is a popular way to reduce your state estate tax liability.
Connecticut
Maine
Massachusetts
Minnesota
Oregon
New York
Rhode Island
Vermont
Washington
Conclusion
It is no surprise that DAF’s are becoming a popular charitable tool given their wide range of benefits. For those that are charitably inclined and looking for a tax-efficient, simple and efficient solution, a DAF likely makes sense for you.
Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information. This article is for education purposes and should not be treated as tax or legal advice. This article is not a substitute for legal or tax advice from your professional legal or tax advisor.