Donor-Advised Funds: Giving Smart, Giving Big

Donor-advised funds (DAFs) have transformed the landscape of charitable giving, offering a strategic and flexible approach to philanthropy. By separating the timing of contributions from distributions, donors can align their generosity with long-term goals and evolving needs.

Understanding the Basics of DAFs

At its core, a donor-advised fund is a charitable investment account with flexibility held by a sponsoring organization. Donors transfer cash, securities or complex assets into the account and immediately receive a tax deduction for the contribution.

Once assets are in the fund, they can be invested in various portfolios to pursue growth. Donors then recommend grants to IRS-qualified public charities at their own pace. This structure creates a powerful separation between the act of giving and the act of granting.

How They Work

The mechanics of a DAF can be summarized in three straightforward phases:

• Contribute assets (cash, stock, real estate).
• Receive an immediate tax deduction in 2025 for the full fair market value.
• Recommend grants through a seamless grant recommendation process.

Legal ownership of the donated assets passes to the sponsoring organization, but donors retain advisory privileges. The organization handles due diligence, compliance and distributions to ensure grants meet IRS criteria.

Key Tax Advantages

Donor-advised funds offer multiple tax benefits that can amplify philanthropic impact:

Additional advantages include:

- Avoidance of capital gains tax when donating appreciated assets directly.
- Tax-free growth within the fund, allowing assets to compound over time.
- Donation bunching to exceed the standard deduction threshold in high-income years.
- Estate planning benefits: assets are removed from your taxable estate, helping protect assets from estate taxation.

Strategic Giving Approaches

DAFs enable donors to design giving strategies tailored to personal passions and societal needs. Consider these approaches:

• Flexible timing: respond rapidly to emergencies or emerging causes.
• Anonymous granting: support sensitive initiatives without revealing identity.
• Recurring grants: set up annual support for favorite charities.
• Centralized giving: consolidate all charitable activity into one account.

Family and Legacy Planning

Involving family members in philanthropic decisions can foster a multi-generational philanthropic vision and legacy. Many sponsoring organizations allow donors to name successor advisors and establish guidelines for future grants.

This collaborative approach not only builds shared values, but also provides a platform to educate younger generations about the responsibility and joy of giving. Over time, a family’s collective impact can grow exponentially.

The Role of Sponsoring Organizations

Sponsoring charities are the backbone of every DAF. They perform crucial functions, including

• Conducting due diligence on grant recipients to ensure IRS compliance.
• Providing investment options and professional advisory support.
• Processing grants and managing administrative tasks.

Their expertise ensures that donors can focus on philanthropic vision rather than paperwork, while maintaining rigorous standards for charitable distributions.

Considerations and Limitations

While DAFs offer many benefits, donors should be aware of potential drawbacks:

- Administrative and investment fees charged by the sponsoring organization.
- Less direct control compared to establishing a private foundation.
- Concerns about the timing of distributions and overall transparency.
- Irrevocability: once assets are contributed, they cannot be returned to the donor.

Future Trends and Regulatory Changes

The regulatory landscape for DAFs continues to evolve. Proposed rules include mandatory payout requirements for large funds and new timelines to encourage timely grantmaking.

Starting in 2026, the universal charitable deduction for non-itemizers will cap at $1,000 for individuals and $2,000 for couples. High-income donors may face reduced itemized deduction limits, making DAFs more attractive for strategic tax planning.

Making the Most of 2025

The current tax environment represents a unique window of opportunity. Funding a DAF before year-end 2025 allows donors to lock in current deduction limits and then distribute grants over years, adapting to new tax rules as they take effect.

By acting now, you can leverage simplified recordkeeping and tax reporting and preserve maximum flexibility for future philanthropic goals.

Practical Steps to Begin

Ready to establish your donor-advised fund? Follow these actionable steps:

• Select a reputable sponsoring organization aligned with your values.
• Choose the type of assets you wish to donate (cash, securities, real estate).
• Decide on an investment strategy that balances growth and risk.
• Submit grant recommendations to charities when you’re ready to make an impact.

With these steps in place, you’ll be on your way to amplifying philanthropic impact through smart giving and building a lasting legacy of generosity.