Donor-Advised Funds: A Charitable Planning Conversation Worth Having
Some clients know exactly which charities they want to support and when.
Others simply know that giving is important to them.
They may have experienced an unusually high-income year, be sitting on highly appreciated investments, be preparing to sell a business, or want to make philanthropy a more intentional part of their financial plan.
That's where a donor-advised fund, or DAF, can become an interesting planning conversation.
A DAF won't be appropriate for every client, and financial advisors should coordinate with qualified tax professionals regarding individual tax consequences. But understanding how these accounts work can help advisors recognize when charitable intentions and financial planning opportunities may intersect.
What Is a Donor-Advised Fund?
A donor-advised fund is a charitable giving account maintained by a sponsoring 501(c)(3) organization.
The donor contributes assets to the account, and the sponsoring organization assumes legal control of those assets. The donor generally retains advisory privileges over how assets are invested and which eligible charities ultimately receive grants.
Once contributed, the assets no longer belong to the donor. A DAF isn't simply another personal investment account earmarked for future charitable giving.
What it can provide is a way to separate two decisions that clients sometimes struggle to make simultaneously: When should I make the charitable contribution? and Which organizations do I ultimately want to support?
Why Timing Can Matter
Imagine a client who has an unusually high-income year.
Perhaps they receive a significant bonus. Their business has an exceptional year. They exercise stock options. Or they're approaching a major liquidity event.
The client also intends to make substantial charitable gifts but hasn't decided exactly which organizations should receive the money.
Funding a DAF may allow the client to make the charitable contribution now and recommend grants from the account to eligible charities over time.
For federal tax purposes, charitable deductions are subject to numerous eligibility requirements and limitations. The IRS notes that deductible charitable contributions generally must be made to qualified organizations, and applicable percentage-of-AGI limits depend on the type of contribution and recipient.
That makes timing a potentially valuable conversation—but also one that should include the client's tax professional.
Appreciated Assets Can Make the Conversation More Interesting
Cash isn't the only asset clients may consider giving.
Suppose a client owns publicly traded stock that has appreciated significantly over many years.
Selling the shares first could create a taxable capital gain. Contributing appreciated property directly to an eligible charitable organization may produce a different result.
IRS guidance provides that capital-gain property held for more than one year can generally be deductible at fair market value when donated, although important limitations and exceptions apply. The rules differ depending on the property, recipient organization, the taxpayer's circumstances, and applicable AGI limitations.
For an advisor managing a client's investment portfolio, that creates an obvious reason to start a conversation before automatically liquidating appreciated assets intended for charitable giving.
The question isn't simply: "How much do you want to donate?"
It may also be: "What should you donate?"
DAFs Can Help Make Giving More Intentional
Tax efficiency shouldn't be the only reason clients discuss charitable planning.
A donor-advised fund can also give families a structure for thinking more deliberately about philanthropy.
A client might contribute during a particularly strong financial year and then recommend grants over several years.
Parents may use the account to begin conversations with children about causes the family wants to support.
Retired clients may decide they want charitable giving to become a regular part of their financial lives rather than a collection of year-end checks.
Business owners approaching an exit may want to incorporate philanthropy into the larger wealth transition they're planning.
The financial strategy can support the client's values rather than dictate them.
Watch the Rules
The flexibility of a DAF doesn't mean there are no restrictions.
The sponsoring organization legally controls contributed assets, even though donors generally retain advisory privileges regarding investments and grants.
There are also rules designed to prevent donors and related parties from receiving impermissible benefits from DAF distributions. The IRS warns that arrangements producing prohibited benefits can trigger significant tax consequences.
Documentation matters as well. Noncash charitable contributions can carry additional substantiation and reporting requirements depending on their value and the type of property donated.
This is another area where coordinated planning matters.
The advisor can identify the opportunity. The client's CPA or tax professional can evaluate the specific tax consequences and reporting requirements. The DAF sponsor can address its own contribution and grant-making procedures.
Five Questions That Can Start the Conversation
Advisors don't need to wait for a client to say, "I'd like to establish a donor-advised fund."
Instead, charitable planning can emerge naturally from broader conversations:
1. Do you expect your income to be unusually high this year?
2. Are you holding appreciated investments you've considered selling?
3. Is charitable giving an important part of your long-term financial plan?
4. Do you know which organizations you want to support, or are you still deciding?
5. Would you like your family to become more involved in your charitable giving?
The answers may point toward a DAF—or toward an entirely different strategy.
Either outcome is useful.
Charitable Planning Is Part of the Bigger Financial Picture
A donor-advised fund isn't simply a tax strategy.
Used appropriately, it can connect investment planning, tax planning, estate considerations, family conversations, and a client's philanthropic goals.
That's what makes the topic valuable for financial advisors.
Clients may initially come to you wanting to know how much they can afford to give. A deeper conversation can help them think about when to give, what assets to give, and how charitable giving fits into the financial life they're building.
When those decisions carry significant tax implications, bringing the client's tax professional into the conversation early can help ensure the strategy works as intended.
The goal isn't simply to find another deduction.
It's to help clients use their wealth more intentionally.
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