What Can a Donor-Advised Fund Do for You? (A Lot)

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Donor-advised funds (DAFs) have emerged as a popular charitable giving vehicle that centralizes and streamlines a donor's charitable giving online, without the administrative burdens of a private foundation.

These charitable funds come with some important tax and planning advantages — as well as a few administrative quirks — that investors should be aware of.

Generally, a DAF is a separately identified fund or account maintained and operated by a sponsoring organization (sponsor) classified as a public charity. Once the donor makes the contribution, the organization has legal control over it.

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However, the donor, or the donor's successor advisor, retains advisory ability over the distribution of funds and the investment of assets in the account.

A push for some regulation of DAFs

The potential of donor-advised funds to accumulate funds without being required to distribute them to charities has long drawn the attention of Congress and the IRS.

For instance, legislation proposed in 2021 (but not enacted to date) included provisions to essentially force DAF money to be made available to charities within a certain period of time.

The proposed legislation would also disallow private foundation grants to DAFs as counting toward annual foundation payout requirements.

In addition, regulations proposed in November 2023 (but not finalized) would effectively prohibit the payment of certain compensation by DAF sponsors.

While such proposed measures may generate uncertainty, their focus remains on the actual or perceived abuse of DAF accounts by donors (and potentially their advisors) who seek to accumulate but not distribute funds to charities.

However, for donors who seek to simplify, but not unduly delay their charitable giving, DAFs may still serve as a viable and powerful vehicle for philanthropic giving, and also work in conjunction with other charitable vehicles.

Here is how you could potentially use DAFs to complement other strategies to increase flexibility in giving and tax relief, and still stay clear of the legislative and regulatory proposals that have arisen.

Using DAFs as a complement to private foundations

Private foundations and donor-advised funds can help support causes and meet financial and estate planning goals in slightly different ways. Using a combination of both can give you more flexibility in a few important areas:

1. Maximize your charitable deduction to the limit

In a year of high income tax exposure, those who plan to donate appreciated long-term marketable securities (other than publicly traded partnership units) to an existing private foundation may also donate additional appreciated long-term marketable securities to a DAF.

Because DAFs typically qualify as a public charity, they offer a higher deduction threshold. So, by giving to both a private foundation and a DAF, you can “stack” your donations to maximize your charitable deductions.

For instance, individuals may donate publicly traded long-term appreciated securities equal to 20% of adjusted gross income (AGI) to their private foundation, plus an additional amount of long-term appreciated securities equal to 10% of AGI to a DAF, for a total charitable deduction equal to 30% of AGI, with a five-year carryover period of any excess deduction.*

2. Deduct fair market value (rather than just cost basis)

Those anticipating liquidity for different types of assets could come out ahead by channeling donations of certain types of assets to a private foundation and others to a DAF. For example:

They may want to channel their marketable securities to their private foundation.
On the other hand, they may want to direct their non-publicly traded assets (e.g., business interests or real estate) to a DAF.

Why? Unlike a private foundation to which a donation of long-term appreciated non-publicly traded assets yields only a cost-basis deduction, a DAF enables donors to base their deduction on the fair market value of such assets at the time of donation.

In this way, a DAF can complement a private foundation in supporting a wider array of assets to potentially donate.

3. Widen your mission’s scope, and keep it private

Families that maintain a private foundation for a publicly stated mission may wish to separately and individually support certain causes beyond the foundation's parameters and scope.

In such cases, they may make such grants through a DAF, which can also provide anonymity, if desired.

4. Support foreign charities with less red tape and expense

Private foundations that grant to foreign charities must engage in the additional procedures of either equivalency determination to certify that the foreign charity is the equivalent of a U.S. public charity, or expenditure responsibility process, which may entail additional legal fees.

DAFs also generally perform the same procedures in granting abroad, and their fees for doing so may be less. So, anyone considering this should compare compliance expenses between the two vehicles.

DAFs as a charitable remainder trust beneficiary

A charitable remainder trust (CRT) is a split-interest trust that allows an individual, during life or at death, to contribute a remainder interest in property to charity, while reserving the right to receive income for one or more named non-charitable beneficiaries (which may include the grantor) for a term of years or for life.

As a result, the grantor may qualify for a current income tax charitable deduction for the present value of the remainder interest ultimately passing to charity. (For long-term marketable securities donated to a CRT benefiting a public charity, the deduction remains limited to 30% of the donor’s adjusted gross income.)

Also, while the donor retains the right to receive annual taxable distributions, the CRT itself pays no income tax on any gains recognized upon selling the contributed asset, essentially providing for tax deferral over the term of the CRT.

When funding a CRT, many donors already have specific plans for the remainder interest (perhaps intending for it to pass to a favorite public charity).

Others have only a general idea, perhaps an area of interest. Flexibility remains an important factor, as the donor's charitable priorities may change, the activities of a charity may change, as well as the landscape of needs.

CRT donors may retain the power to change the charity or leave such a choice to the trustee. Alternatively — or in addition — naming a DAF sponsor as the remainder beneficiary of the CRT may further enhance the flexibility for the donor, without tying him or her to a specific charity.

Under this option, the CRT donor (or successor DAF advisor) may adjust the roster of recommended charities as philanthropic priorities shift.

DAFs as a charitable lead trust beneficiary

By contrast, a charitable lead trust (CLT) is a trust in which the income interest is paid to a charitable beneficiary first, and the remainder interest passes to a non-charitable beneficiary (often descendants of the grantor) at the termination of the trust. (For a non-grantor CLT, the trust — not the grantor — bears the taxation of the trust’s income and claims the corresponding deduction for amounts paid to charity.)

For CLTs established as a non-grantor trust, inadvertent estate inclusion could occur if the grantor maintains grant-making control over the charitable income beneficiary, e.g., the grantor's family foundation.

In such a case, the grantor's estate may include both the contributed assets and any subsequent appreciation, thereby defeating the estate planning benefits of efficiently conveying wealth to the CLT remainder beneficiaries.

For this reason, designating a DAF sponsor instead as the charitable income beneficiary, provides the ability to recommend various charities through the CLT term, without the estate inclusion that could result from naming the grantor's private foundation as the income recipient.

Summary

While laws governing charitable giving can always change, DAFs can serve as a key component of an overall charitable plan, for those who align with the goal of expedited and efficient giving.

* Alternatively, donors giving in the form of just cash in 2025 could stack their cash donations to separate public charities and deduct the total amount up to the limit of 60% of AGI, with a five-year carryover period of any excess deduction.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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As Head of Philanthropy & Family Governance Advisory, NB Private Wealth, a division of Neuberger Berman, Julia guides family members in proactively navigating their future and philanthropic journey together. Common topics covered with significant families include wealth communication and disclosure, succession planning and post-liquidity governance in determining a new common framework for the family and its wealth. Julia has lectured widely in the areas of philanthropy and family governance, with her perspective featured in The New York Times, Forbes, the Financial Times and Barron’s. Julia has authored articles for Trusts and Estates magazine and the Leimberg Estate Planning Newsletter and regularly speaks on charitable giving.