Donor-advised fund (DAF)

A charitable giving account that gives an immediate tax deduction for contributions, then lets the donor recommend grants to charities over time.

What it means

A donor-advised fund is an account held by a sponsoring public charity. The donor contributes cash, stock or other assets and can deduct the gift in the year it is made, within the IRS limits for charitable deductions, if they itemize. The money can be invested and grow tax-free, and the donor later recommends grants to qualifying charities on their own schedule.

Gifts to a DAF are irrevocable: the sponsor legally owns the assets, and the donor only advises how they are granted. Donating appreciated investments held more than a year generally avoids capital gains tax while still allowing a deduction for their market value. Sponsors charge administrative fees and set their own minimums and rules.

Example

Suppose a donor who usually gives $6,000 a year contributes $30,000 of long-held stock to a DAF in a high-income year. They can deduct the gift that year, avoid capital gains tax on the stock’s growth and then recommend $6,000 in grants each year for five years.

How it’s used

Bunching several years of giving into one tax year
Donating appreciated stock
Giving in a high-income year, such as after a bonus or business sale

Strengths and weaknesses

Strengths

Deduction in the year of contribution
Avoids capital gains tax on donated appreciated assets
Simplifies record-keeping for many gifts
Assets can grow before being granted

Weaknesses

Contributions are irrevocable
Administrative fees reduce the amount available for charity
No legal requirement for the sponsor to follow every grant recommendation
Deduction helps only if the donor itemizes

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.