Donor-Advised Funds: The Basics

A Guide to Donor-Advised Funds

Donor-Advised Funds: A Powerful Tool for Strategic Impact

Donor-advised funds (DAFs) have emerged as a cornerstone of modern philanthropy, offering a flexible and efficient way for individuals to manage their charitable giving. These philanthropic vehicles have gained significant popularity in recent years, with assets doubling from $70 billion in 2014 to over $240 billion in 2024. DAFs offer the flexibility and personalization of a family foundation, but without the administrative headache and regulatory burdens.

A DAF is a charitable investment account that allows donors to contribute assets, receive an immediate tax deduction, and recommend grants to qualified charities over time.  

History and Growth

DAFs have been around since the 1930s: New York Community Trust offered some of the first DAFs in the country. In the 1990s, commercial financial institutions like Schwab, Fidelity, and Vanguard began offering DAFs for clients seeking better ways to unite their giving with their total financial portfolio - or seamlessly realize the tax benefits offered by DAFs. Their growth has been exponential, particularly in the last decade, as more donors recognize their potential for strategic giving.

What are the Benefits of Donor-Advised Funds?

• Tax Efficiency

One of the primary attractions of DAFs is their tax efficiency. Donors receive an immediate tax deduction when they contribute to their DAF. This can be up to 60% of their adjusted gross income (AGI) for cash donations and 30% for securities and other appreciated assets. This allows for strategic timing of contributions, particularly in high-income years.

• Flexibility and Control

DAFs offer donors the flexibility to contribute now and decide on recipients later. There’s no pressure to meet a calendar deadline: donors immediately claim the tax benefits, but can determine a philanthropic vision or ultimate goal at a future date.  While the funds are irrevocably dedicated to charitable giving - that means you can never transform the dollars back into cash in your own pocket -  donors can recommend how their contributions are invested and which charities receive grants over time. 

• Simplification of Giving

For donors supporting multiple causes, DAFs simplify the process by consolidating giving into one account. This streamlines record-keeping and allows for a more organized approach to philanthropy.

• Growth Potential

DAF contributions can be invested, growing tax-free over time. Contributions can be invested in mission-focused portfolios, spread throughout the market, or even directed into unique ventures or investment opportunities. Investment options vary, depending on the fund sponsor selected, and the overall size of the account. Donors with no immediate plans to distribute their DAF assets often invest funds in mission-aligned investments like clean energy. 

Why Choose a Donor-Advised Fund?

DAFs are an excellent solution for charitable impact for several reasons:

• Immediate Impact with Long-term Planning 

Donors can make a significant charitable contribution now, securing the tax benefits, and thoughtfully distributing funds over time. Using a DAF giving platform, like Daffodil, offers visibility and high return-on-impact for charitable distributions.

• Family Involvement

 DAFs can be used to engage family members in philanthropy, creating a lasting tradition of giving, without the administrative hassle of a family foundation. 

• Professional Expertise

Many DAF sponsors offer professional investment management and due diligence on potential grant recipients. Other sponsors offer a personalized approach to charitable giving, offering recommendations of effective nonprofit organizations or opportunities to leverage charitable giving for greater impact.

• Anonymity Option

DAFs allow for anonymous giving, which can be important for donors concerned about privacy or unwanted solicitations. For an extra layer of privacy, you can name your DAF after a cause area or a neutral name  (Main Street DAF instead of the Jane Smith Family DAF) and select anonymous giving when making distributions. If you’d like to retain anonymity but receive regular updates on your giving, Daffodil offers consistent impact visibility without distributing your personal information. 

• Lower Administrative Burden

Compared to private foundations, DAFs have simpler public disclosure requirements and no excise taxes on investment income. Private foundations require annual distribution minimums, whereas DAFs currently have no similar restrictions. 

DAFs aren’t entirely without controversy – some argue for stricter regulation and mandatory payout rates, like private foundations – but they remain a powerful tool for strategic philanthropy. The current average distribution rate for a DAF hovers around 20%, significantly higher than the 5% minimum required of private foundations.

For thoughtful investors looking to make a meaningful impact through their charitable giving, donor-advised funds offer a flexible, tax-efficient, and strategically powerful option. By allowing for immediate tax benefits, long-term planning, and potential growth of charitable assets, DAFs enable donors to maximize their philanthropic impact while aligning with their personal financial goals. With Daffodil, donors benefit from continuous visibility into the impact of their DAF’s charitable investments.

Ready to connect your DAF? Get started today to discover giving opportunities, real-time outcomes, and optimize your strategy for maximum return on impact.

This information is provided for general informational purposes only and should not be construed as investment, tax, or legal advice; always consult with a qualified investment advisor, certified public accountant, or licensed attorney for personalized guidance tailored to your specific financial situation and legal needs.