Donor-Advised Funds: A Flexible, Tax-Smart Way to Give

For many families, giving is one of the most meaningful things they do with their wealth — and one of the most under-planned. A donor-advised fund, or DAF, is a simple, increasingly popular tool that lets you separate two decisions that often get tangled together: when you fund your giving and when the money reaches the charities you care about. Done thoughtfully, it can make your generosity both more strategic and more tax-efficient. This guide walks through how a donor-advised fund works and the decisions worth getting right.

What is a donor-advised fund?

A donor-advised fund is a charitable giving account held at a public charity known as a sponsoring organization. You contribute cash or other assets, become generally eligible for a charitable tax deduction in that year, and then recommend grants to the qualified charities you support — on your own timeline. Meanwhile, the balance can be invested for potential tax-free growth, giving you more to grant over time. Think of it as a dedicated account for your giving, rather than writing individual checks throughout the year.

How a donor-advised fund works

*Ensure to consult a CPA or tax professional before moving forward with any steps below.

In practice, a donor-advised fund follows three straightforward steps:

• 1.Contribute. You make an irrevocable gift of cash, appreciated securities, or in some cases other assets to the fund. In most cases you are eligible for a charitable deduction in the year you contribute, whether or not you grant the money out that same year.
• 2.Invest & grow. The assets in the fund can be invested according to your recommendations. Any growth is not subject to tax, which means more dollars may ultimately reach the causes you care about.
• 3.Grant. You recommend grants to qualified charities whenever you like — all at once, or spread across many years. The sponsoring organization handles the administration, recordkeeping, and due diligence.

The potential tax advantages

Much of the appeal of a donor-advised fund comes from how it can improve the tax efficiency of giving you were already planning to do:

• —An immediate deduction. You are generally eligible to claim a charitable deduction in the year you fund the account, even if the grants go out over many future years.
• —Giving appreciated assets or business ownership. Donating long-term appreciated investments — such as stock that has grown in value or other business ownership — can help you avoid the capital gains tax you might owe if you sold them first, while still deducting the fair market value.
• —Tax-free growth. Because the assets are held by a charity, any investment growth inside the fund is not taxed — potentially leaving more for the causes you support.
• —Bunching your giving. Some donors concentrate, or "bunch," several years of planned giving into a single tax year to exceed the standard deduction threshold, then recommend grants gradually. A donor-advised fund makes this approach practical.

When a donor-advised fund makes sense

A donor-advised fund is not the right tool for everyone, but it can be especially useful in a few common situations: a high-income year, such as a bonus, business sale, or exercised equity, when a larger deduction is valuable; a portfolio holding concentrated or highly appreciated stock you would like to diversify without triggering the full capital gains bill; or simply a desire to give more intentionally over time rather than reactively. It can also be a meaningful way to involve family in a shared giving tradition.

Things to keep in mind

• —Contributions are irrevocable. Once you give to the fund, the assets legally belong to the sponsoring charity. You retain advisory privileges over investments and grants, but you cannot take the money back.
• —Grants must go to qualified charities. A donor-advised fund can only grant to IRS-qualified public charities, and the funds cannot be used for personal benefit, such as event tickets or fulfilling a legally binding personal pledge.
• —There are costs. Sponsoring organizations typically charge an administrative fee, and the underlying investments carry their own expenses. These are worth understanding up front.
• —It is one tool among several. Depending on your goals, other vehicles — such as qualified charitable distributions from an IRA or a private foundation — may fit better or work alongside a donor-advised fund.

How a fiduciary advisor can help

A donor-advised fund is most powerful when it is coordinated with the rest of your financial life — your tax picture, your investment portfolio, and your estate and legacy goals. As independent, fiduciary advisors, we can help you decide whether a donor-advised fund fits your situation, choose which assets are most tax-efficient to give, and integrate your charitable planning into your broader financial plan. Because we work in a fiduciary capacity, our guidance is built around your goals, not a product. We always recommend coordinating charitable strategies with your tax professional.

This article is for educational purposes only and does not constitute individualized investment, tax, or legal advice. Donor-advised fund rules, contribution limits, and deductibility depend on your specific circumstances and are subject to change; consult your tax professional and the sponsoring organization for current details before acting. Charitable contributions to a donor-advised fund are irrevocable. Legacy Wealth Partners does not provide tax or legal advice. Advisory services offered through Commonwealth Financial Network®, a Registered Investment Adviser.