Understanding Donor-Advised Funds
/A flexible giving strategy with real tax benefits when used intentionally
For individuals and families who are both financially successful and charitably inclined, donor-advised funds (DAFs) offer a rare combination: the ability to give back on your terms while also making a smart planning decision. These funds aren’t new or obscure. In fact, they’ve been part of the tax code for decades and are used by some of the most strategic donors in the country.
But despite their growing popularity, DAFs are still often misunderstood. What are they? How do they actually work? And in what scenarios do they make the most sense?
Let’s walk through it clearly and practically.
What Is a Donor-Advised Fund?
A donor-advised fund is a type of charitable giving account. You contribute assets to the account—whether it’s cash, stock, or other investments—and receive a tax deduction in the year you contribute. From there, you can recommend grants to qualified 501(c)(3) charities over time.
Importantly, once the assets are in the DAF, they are irrevocably committed to charitable purposes. You can’t take the money back. But you do retain control over when and where the grants are sent. That combination of upfront deduction and future flexibility is what makes DAFs such a powerful planning tool.
How a Donor-Advised Fund Works
The mechanics are straightforward:
You contribute cash, appreciated securities, or other eligible assets to the DAF.
You receive a tax deduction in the year of the gift, subject to IRS limits.
The assets can be invested within the DAF for potential tax-free growth.
You recommend grants to qualified charities on your own timeline—whether that’s in the coming months or over the next several years.
Think of it as creating your own charitable giving account. You make the decision to fund it once, then draw from it intentionally to support causes that matter to you.
Why Donating Stock Can Be Even More Tax Efficient
While DAFs accept both cash and investments, appreciated stock is often the more strategic choice. That’s because donating appreciated assets provides a double benefit:
You avoid paying capital gains tax on the appreciated value of the stock.
You still receive a charitable deduction for the full fair market value of the asset.
This makes DAFs especially attractive for individuals who hold long-term stock positions with significant unrealized gains. Rather than selling, paying tax, and then donating what’s left, you can donate the shares directly and let the full value go to work.
Charitable Deduction Limits and Why Timing Matters
When you contribute to a donor-advised fund, the charitable deduction happens in the year of the contribution—not when the funds are ultimately granted to a nonprofit. This is a key concept. You’re consolidating the deduction into a single year, even if your giving takes place gradually over time.
The IRS limits how much of that deduction you can take in a given year, based on your Adjusted Gross Income (AGI):
Cash contributions to a DAF are deductible up to 60 percent of AGI
Appreciated securities are deductible up to 30 percent of AGI
Here’s how that works in practice:
If you have $800,000 of AGI in a high-income year, you could deduct up to $480,000 for cash gifts (60 percent of AGI).
For appreciated securities, the deduction cap would be $240,000 (30 percent of AGI).
If your gift exceeds those limits, the unused portion can be carried forward for up to five additional years.
This timing flexibility also makes donor-advised funds especially useful in today’s tax environment. Because the standard deduction is so high—currently over $27,000 for married couples—fewer people itemize their deductions each year. A strategy known as “bunching” has become more common, where individuals group multiple years’ worth of charitable giving into a single tax year in order to surpass the standard deduction and unlock the full benefit of itemizing.
By combining that approach with a DAF, you can:
Make a single large contribution now
Take the deduction in the year you itemize
Spread your actual charitable gifts over multiple years
That’s why DAFs aren’t just about giving. They’re about giving with intention and aligning your generosity with a smart tax strategy.
When a DAF Makes the Most Sense: Real-World Examples
Donor-advised funds are not one-size-fits-all, but in the right situations, they can be incredibly effective. Here are a few examples of when we’ve seen them add real value:
A High-Income Year
If you're experiencing a year with unusually high taxable income—whether from a stock option exercise, RSU vesting, a business sale, or even a large bonus—a contribution to a DAF can help offset the spike. You front-load a charitable deduction while retaining the flexibility to give over time.
Pre-Retirement Planning
In the final years of your career, income is often at its peak. This can be a smart window to make a sizable charitable contribution, securing the deduction when it’s most valuable while building a pool of funds you can use to support causes during retirement.
Managing a Concentrated Stock Position
Rather than triggering gains by selling a long-held stock position, donating shares directly to a DAF can help reduce portfolio risk, eliminate capital gains tax, and create philanthropic leverage.
Simplifying Charitable Giving
For families who give regularly, managing receipts, timing, and tax documentation can become a hassle. A DAF consolidates everything into a single deduction in the year of contribution, then lets you support multiple charities with clean recordkeeping and no year-end rush.
Final Thoughts: A Smart Tool for Thoughtful Givers
At its core, a donor-advised fund is not just a tax move—it’s a planning tool for people who genuinely want to give back but also want to do so intentionally. It provides structure, flexibility, and potential tax savings. Most importantly, it lets you align your financial decisions with your values.
Donor-advised funds are just one of many planning tools that can make a meaningful difference when used in the right context. Whether it’s tax strategy, charitable giving, or navigating a high-income year, having a coordinated financial plan ensures each decision fits into the bigger picture.
Frequently Asked Questions
What happens to the money in a DAF if I don’t distribute it right away?
The assets remain in the DAF until you recommend a grant. In the meantime, they can be invested for potential tax-free growth. There is no required timeline for making grants, but sponsors may have policies on inactivity.
Can I contribute to a DAF every year?
Yes. You can make recurring contributions, whether for consistent tax planning or as part of a long-term charitable giving strategy.
Is a DAF right for me if I live in Cincinnati or Ohio?
If you’re a high-income individual or business owner in Ohio—especially in a city like Cincinnati where concentrated stock positions and RSUs are common—a DAF can be a powerful tool. It’s particularly relevant when paired with broader strategies like tax oversight and income planning.
Do I still get a deduction when I distribute funds from the DAF?
No. The charitable deduction occurs at the time of contribution to the DAF. Distributions made later to charities do not generate an additional deduction.
How is a DAF different from giving directly to a charity?
Giving directly to a charity provides an immediate impact and deduction. A DAF offers more flexibility—you get the deduction now but can choose which charities to support and when. It also allows for anonymous giving and consolidated recordkeeping.
Disclaimer: This communication is intended for informational purposes only and should not be construed as personalized financial, investment, or tax advice. Donor-advised funds may not be suitable for all investors. Please consult with your tax and legal advisors before making any financial decisions. Advisory services offered through Vaultis Private Wealth LLC, a registered investment adviser.