A Smarter Way to Give: Why Donor-Advised Funds May Be One of the Best Year-End Strategies for Your Charitable Goals
- Steven C. Balch, CFP®
- Dec 9
- 5 min read
As the year wraps up, many individuals and families start thinking about charitable giving. Most people write a check or donate cash. While that’s generous, it’s not always the most tax-efficient way to give.
One of the most tax-efficient tools for charitable gifting is a Donor-Advised Fund (DAF). For anyone looking to maximize impact, simplify giving, or take advantage of year-end tax planning, a DAF can be a game changer.
Below is a simple and clear breakdown of how DAFs work and why more donors are using them.
What Is a Donor-Advised Fund?
A Donor-Advised Fund is a special type of charitable account that allows you to donate appreciated assets and potentially receive the tax deduction. Think of it as a flexible philanthropic investment account. You contribute assets up front, get a tax deduction right away, and then recommend grants to the nonprofits you care about whenever you choose.
Organizations like Schwab Charitable and Fidelity Charitable offer simple, low-cost DAF options that make the process easy.
How to Use a Donor-Advised Fund Work
1. Establishing the Fund
To begin, you open a Donor-Advised Fund with a sponsoring organization, such as a community foundation or financial institution that offers DAFs.
2. Contribute Assets
You can contribute a variety of assets to your DAF, including:
Cash
Stocks
Mutual funds
ETFs
Real estate
Other appreciated assets
Once contributed, the money is irrevocably earmarked for charity, and you receive an immediate tax deduction for the fair market value.
3. Invest the Funds
The assets in your DAF can be invested and have the potential to grow tax-free over time, allowing for even more impactful charitable contributions.
4. Recommend Grants
At any time, even years later, you can request that funds be distributed to qualified nonprofits. The DAF handles the administrative work and compliance checks.
5. Enjoy Simplified Record-Keeping
Instead of tracking multiple receipts from multiple charities, your DAF provides one consolidated tax document for all donations.
Why Consider a Donor-Advised Fund (DAF)?
1. Flexibility
You can bunch contributions into one year (for tax purposes) but spread out donations to charities over many years.
2. Tax Efficiency
DAFs help donors:
Receive an immediate charitable deduction
Avoid capital gains tax on appreciated assets
Allow assets to grow tax-free inside the fund
This makes them especially powerful for high-income earners or those with appreciated investments.
3. Legacy Planning
A DAF can be incorporated into your estate plan. You can name successor advisors, children, grandchildren, or other loved ones to continue granting funds after you're gone, creating a multi-generational charitable legacy.
4. Privacy Options
Many DAFs allow grants to be made anonymously, helping you support causes without public recognition if that’s your preference.
A Simple Example of How a Donor-Advised Fund Can Help
Mr. Johnson is 58, charitably inclined, and wants to make a meaningful year-end gift. He owns stock he bought for $5,000 that’s now worth $20,000. He’s already realized gains this year and expects to be in a higher bracket, so maximizing his deduction matters.
He has two goals:
Get the full deduction this year
Give only part of the money now and save the rest for future gifts
A Donor-Advised Fund (DAF) lets him do both.
Here’s how it works:
He transfers the $20,000 of appreciated stock directly into a DAF. The DAF sells the stocks and raises the cash. This allows him to avoid capital gains tax on the $15,000 of appreciation, while he gets a $20,000 charitable deduction this year, even though he doesn’t plan to give it all away now. He then recommends allocating $10,000 to local charities this year, while the other $10,000 stays invested in the DAF, where it can grow tax-free for future giving.
By gifting the shares to the DAF, he potentially maximizes his deduction in a high-income year, eliminates capital gains tax on the appreciated shares, and controls the amounts he gifts to the charities he wants. The DAF gives him a simple, flexible, and tax-efficient way to support the causes he cares about now and in the future.
Final Thoughts
Donor-Advised Funds are among the most effective tools for charitable giving, especially at year-end, when tax planning and philanthropy often go hand in hand.
DAFs enable donors to make a charitable contribution, receive an immediate tax deduction, simplify their giving, and remain in control of grants over time to their favorite charities.
- Steve Balch, CFP®
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Frequently Asked Questions About Donor-Advised Funds (DAFs)
What is a Donor-Advised Fund?
A Donor-Advised Fund (DAF) is a charitable account where you can donate assets, receive an immediate tax deduction, and give the money to nonprofits over time. It’s one of the most flexible and tax-efficient ways to manage charitable giving.
How do Donor-Advised Funds work?
You contribute cash or appreciated assets into the DAF, receive a tax deduction right away, and then recommend grants to charitable organizations whenever you choose. The sponsoring organization handles administration, record-keeping, and compliance.
What can I contribute to a DAF?
You can donate:
Cash
Stocks, ETFs, and mutual funds
Real estate
Privately held business interests (in many cases)
Cryptocurrency (at some sponsoring organizations)
Contributing appreciated assets often provides the biggest tax benefits.
Do I get a tax deduction when I contribute to a DAF?
Yes. You receive a charitable deduction for the full fair market value of the contribution in the year you donate, subject to IRS limits. This applies even if you choose to distribute the funds to charities over several years.
Can I avoid capital gains tax by donating stock to a DAF?
Yes. Donating appreciated stock (or other assets) directly to a DAF allows you to avoid paying capital gains tax on the appreciation. You also receive a deduction for the full value of the asset.
Can the money in my DAF grow over time?
Yes. Most sponsoring organizations allow you to invest the assets inside your DAF. Any growth is tax-free, allowing you to increase your long-term charitable impact.
Who controls the money in a DAF?
Once you donate assets to a DAF, the funds legally belong to the sponsoring organization. However, you retain the right to “advise” or recommend how the money is invested and which nonprofits receive grants.
Can I give anonymously through a DAF?
Yes. Many DAFs allow you to make anonymous donations, which keeps your personal information private from the charities you support.
Is there a minimum size to open a DAF?
Minimums vary by provider. Fidelity and Schwab typically allow opening a DAF with no minimum, making them accessible to many donors.
Can my family participate in giving through a DAF?
Absolutely. You can name successors, involve children in grant decisions, and turn your DAF into a long-term family charitable strategy.
When does it make sense to use a DAF?
A DAF is especially useful when you:
Want to bunch deductions into a high-income year
Have appreciated stock or assets
Want to streamline record-keeping
Want flexibility in timing your gifts
Want to build a family legacy of giving
Do grants from a DAF have to be made right away?
No. You can donate now for the tax benefit and recommend grants at any time in the future, even years later.
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