Donor-Advised Funds

Although we consider ourselves money managers, not experts on taxes or charitable giving, we think our clients should be aware of a potential tool for optimizing tax and gifting strategies.

Donor-Advised Funds (DAFs) are charities whose purpose is to help donors give money to other charities.  They have existed for over 80 years and have recently enjoyed a surge of popularity.  DAFs are similar to private foundations in many ways, but they offer a cheaper, more accessible alternative for the 99.5% of people who don’t have the wealth or the energy to organize and administer their own foundations.

Prominent investment companies such as Fidelity, Schwab, and Vanguard sponsor their own DAFs, helping drive adoption of this valuable tool.  You can learn more about Fidelity’s at  The DAFs offered by many banks and brokers such as Fidelity allow the donor to retain direct control over how and when the funds are distributed.  They do not typically have a minimum annual gifting requirement like private foundations do although the administrator can impose one. Funds can typically remain invested, hopefully growing, while the donor waits to distribute them. Think of DAFs like “holding pens” for money you have promised to give away but haven’t found a recipient for yet.

According to a 2017 report by the National Philanthropic Trust, there were an estimated 285,000 DAFs at the end of 2016 with total combined assets of $85 billion.  During 2016, $23 billion was gifted into DAFs, and $16 billion was disbursed to charities.  DAFs were estimated to account for 8.3% of all charitable giving for that year.  These numbers should continue to grow, especially thanks to a boost resulting from recent tax law changes.

What are the tax advantages of funding future donations through a DAF?  The first pertains to the standard deduction on your income tax return, which changed significantly at the beginning of 2018.  The Tax Cuts and Jobs Act approximately doubled the standard deduction available to all taxpayers, while simultaneously capping the deductibility of state and local taxes.  This means that many more people will now claim the standard deduction on their income tax return, as opposed to “itemizing” deductions individually.  Charitable donations are an “item” and only decrease your income tax liability if you itemize, which happens after you exceed the threshold of the standard deduction.  For a single person, the first $12,000 of deductions, including charitable contributions, don’t lower your income tax liability.  The hurdle is $24,000 for a married couple filing jointly.  This could be quite frustrating for somebody who wants to give away, say, $15,000 per year to charity, as that generous level of giving would generate very little in the way of tax deductions after maxing out the $10,000 limit on deductibility of state and local taxes.

Through a DAF, however, a taxpayer can donate a larger sum of money to enjoy the benefits of itemizing deductions in the current tax year, then take a break in subsequent years while distributing this year’s money more smoothly.  In future, non-donating years, the taxpayer can take advantage of the standard deduction.  In the example above, the taxpayer might contribute $50,000 or $75,000 to a DAF and itemize deductions this year, then make charitable contributions from the DAF for the next two or three years.  When the DAF is nearly empty it is time to make another big contribution and itemize again.  You should consult your tax professional before implementing any strategy.  We note that this strategy only works if you can fund the DAF with enough upfront money to meaningfully exceed the standard deduction and have sufficient taxable income.  It also doesn’t provide any tax savings if you still itemize in years when you don’t contribute to the DAF.

Another potential benefit is the opportunity to make a large contribution to a DAF in a year when your marginal income tax rate is high.  For example, you might earn a windfall bonus that pushes you into the top tax bracket.  For the same reason, it makes sense to consider a DAF in the last year you plan to work, before your tax rate falls in retirement.

DAFs can accept donations of appreciated stock, allowing you to avoid the associated capital gains and get full tax deductibility for the appreciated stock value.  The holding must qualify for long-term capital gains status. DAFs can often accept private, illiquid, assets as well.  Fidelity maintains a staff of five “deal attorneys” to handle donations of privately held stock.  The donor can provide for one or more charities to inherit DAF funds, or can provide for an heir to take over as director.

The organization operating the DAF will typically charge fees.  Fidelity charges 0.6% of your balance annually to administer the DAF, and its investment options charge additional fees in the general range of 0.5%-1% annually.

It seems these funds have some critics.  I was a little surprised to read a New York Times article published on August 3rd criticizing Donor-Advised Funds.  Written by David Gelles, the article sported a sensational headline: “How Tech Billionaires Hack Their Taxes with a Philanthropic Loophole.”  Gelles takes issue with DAFs because they don’t have annual giving requirements and they allow donors to remain anonymous.  The article seems to imply that DAF contributions are therefore a sort of “fake” charity.  He publishes a quote by a professor that DAFs allow for tax deductions without the need to actually give anything away.  This is incorrect.  The money is being given away.  As I quoted above, DAFs distributed an estimated $16 billion in 2016.  This figure is lower than the $23 billion that went into DAFs, but that imbalance will likely continue as long as DAFs keep growing in popularity.

Regarding Gelles’ accusation that DAFs permit too much anonymity, I suppose it depends on whether you respect the right to give money away anonymously but still claim a tax deduction.  A longstanding tenant of the U.S. tax code is that you generally don’t owe tax on income you donate to charity.  Just as you can give your time to a charity freely, you can also earn income freely on behalf of a charity.  The public doesn’t have a right to know what charities you support, although DAFs will only allow you to direct grants to charities recognized by the IRS.

Our position is that charity is good, and things that promote charity are good.  Charity has benefits for the recipient and the donor alike.  Donors can earn positive recognition—although many prefer to remain anonymous.  They often build personal relationships with the recipient’s stakeholders—it’s beneficiaries and its employees, as well as with other donors.  Charity can help keep our priorities calibrated.  Matthew 6:21 says “For where your treasure is, there will your heart be also.”

Donor-Advised Funds aren’t right for everybody, but I would ignore the critics (unless the critic is your accountant) because DAFs are useful tools for pursuing worthy ends.  Would you rather give more money to the IRS or to a charity of your choice?

Miles Putnam, CFA