Donor-advised funds are important channels for philanthropy in the US. The author of this article talks about why they are popular.

While we are now in a new year, the “Giving Season” that typically is associated with the fall and the year-end still generates lessons for the months ahead. The author of this article, Sam Schwartz, of The Donors Fund, writes here about the case for donor-advised funds (DAFs), a form of charitable giving that is now prevalent in the US and also present in the UK. Private foundations are also an important charitable channel in the US and certain other countries – there are pros and cons depending on what they’re used for. Arguably, for example, DAFs afford more anonymity and privacy; foundations can give those involved more overall specific control. Arguably, they have different benefits and challenges for those on a philanthropic journey.

DAFs are now a big area. To gain a sense of how widespread DAFs are in the US, the value of grants from DAF accounts to charitable organizations totaled $54.77 billion in 2023, a 1.4 per cent decrease from $55.53 billion in 2022, according to a report issued in 2024 by National Philanthropic Trust in the US. Holders of DAFs get a deduction from US income tax, as well as an exemption from capital gains tax on gifts of appreciated assets.

DAFs are also exempt from estate taxes. DAFs have sometimes drawn political criticism, because they don’t give financial incentives to donate money quickly. Clearly, the details about DAFs remain a point of debate. 

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At the end of 2024, as is usually the case, there came a renewed focus on philanthropic endeavors. The year-end was also the last chance for tax filers to reduce their taxable income by putting down deductible expenses. Charitable contributions provide some of the biggest tax write-offs of any eligible expense – as much as 60 per cent of annual gross income (AGI) for cash donations or 30 per cent of AGI for assets. 

By timing donations and using charitable giving vehicles like donor-advised funds (DAFs), donors can stretch their deductions further and transform their year-end giving into a strategic financial opportunity.

The tax benefits of DAFs
There are a variety of charitable giving vehicles, including private foundations, trusts, and donor advised funds. DAFs, however, provide one of the simplest paths to tax-efficient giving. 

The donor simply deposits a lump sum into their account – either cash or appreciated stocks – and receives a single tax receipt to claim a deduction for that same year. This approach allows donors to improve their tax position in high-income years while retaining the flexibility to distribute funds to chosen charities over subsequent months or years. 

In sum, the key advantages of DAFs include:
-- Immediate tax deduction of up to 60 per cent of AGI for cash donations; 
-- Simplified asset donation process; 
-- Competitive tax benefits for asset donations (no capital gains tax and full fair market value deduction); 
-- Single tax receipt for consolidated giving; and 
-- Flexibility in timing charitable distributions.

Identifying ideal client scenarios
DAFs are a great option to consider for your high net worth clients who would like to boost both their year-end tax strategy and philanthropic impact. Consider recommending DAF use to clients who match these profiles:

Higher annual earnings
If your client’s business or investments generated higher returns this past year, they may want to reduce their tax liability with end-of-year donations.

Pre-retirement planning
Clients who are approaching retirement can consider frontloading DAF contributions so that they can maximize deductions at a time when their taxable income is higher. This will reduce their tax burden in lower-income years ahead while preserving their ability to donate generously during retirement.

Portfolio rebalancing
If your client has rebalanced their investment portfolio and realized capital gains this year, donating appreciated securities to a DAF can reduce tax liability. They won’t incur capital gains tax, and the donor can deduct the fair market value rather than the cost basis. 

Retirement account distributions
DAF contributions can help offset tax liability for those who withdrew from their tax-deferred retirement accounts and are over age 59½.

There are DAF account funding options to consider. The great thing about DAFs is that they accept a variety of cash and non-cash assets – giving you and your clients the flexibility to plan strategically based on their cash flow and portfolio. Here are four primary methods for funding a DAF:

Cash
As the simplest account funding option, cash donations are ideal for clients with excess liquidity or those seeking to increase deductions in a high-income year.

Stocks and securities
Donating assets to a DAF is a good move for clients facing significant capital gains. They will be able to secure a double tax benefit: no capital gains tax, and the ability to deduct at full fair market value. 

Asset donation is also much easier when using a donor advised fund. Unlike with other charitable giving methods, there’s no need for donors to liquidate stocks beforehand – the DAF provider takes on all the asset transfer logistics.

CLUT/CRUT distributions
For clients with existing CLUT or CRUT structures, distributing funds to a DAF account is a great way to meet disbursement requirements without the pressure to immediately select a charitable recipient.

Credit card payments
Clients who don’t have cash on hand but anticipate cash flow arriving soon can consider donating with a credit card if they need an immediate deduction. 

Improve your clients’ experience with year-end charitable planning
Tax-smart charitable planning is an underserved area of financial advisory, even though many clients are eager to receive this service. If you aren’t already, consider integrating DAF use into your financial strategies to help clients reduce their tax liabilities while supporting meaningful philanthropic goals. It’s a win-win for everyone – you, your clients, and charities. 

About the author
Sam Schwartz brings a dynamic blend of industry knowledge and passion to his role as VP of business development at The Donors Fund. The Donors Fund is a charitable giving and investment platform, which operates online, enabling donors to allocate charitable assets and receive immediate tax deductions.