The Benefits and Drawbacks of DAFs: Legislation, Certificate Programs, and Tax Implications

In my role as an independent philanthropy advisor, I teach. One of the most popular presentations I offer relates to different ways to make donations to charity and the benefits and drawbacks of DAFs. That instruction seems to be timeless, given that $557 billion was donated to charity in 2023 (according to the Giving USA 2024 report), up over $50 billion from the prior year!

So how does a donor-advised fund fit into the conversation?

Most people give from their checkbooks, which is fine for the occasional gift to charity – or if you’re a person who likes to make an automatic donation each month from your checking or savings account. But, if you donate gifts to multiple charities over the course of the year, it can become a bit cumbersome to determine how and where to send money to so many organizations. And, unless you are a great bookkeeper, it is not quite consolidated, either! So that’s where a donor-advised fund, or DAF, comes in. Here are the benefits and drawbacks of DAFs.

The Benefits of DAF Giving

To provide a fuller picture of the benefits and drawbacks of DAFs, here are six reasons to open a DAF:

1) You can donate money for charitable purposes without having to make a decision just yet on where to make a grant recommendation to a favorite charity.

2) You can obtain a potential charitable income tax deduction if the gift value exceeds the standard deduction on your tax return.

3) You can invest the money in a diversified portfolio, or let it sit in a cash position, while you determine where you should make your grant recommendation.

4) You may remain anonymous, if you like, as it relates to charities receiving grants from your DAF.

5) You can name a successor advisor to your DAF should you pass away.

6) You may fund your DAF with non-cash assets like real estate, closely held stock, or tangible personal property.

Commercial DAF sponsors like Fidelity Charitable, DAFgiving360, and Vanguard Charitable are excellent choices for those who want a fast, inexpensive, and technologically streamlined way to donate, informed by the benefits and drawbacks of DAFs. Community foundations like Chicago Community Trust or California Community Foundation also offer DAFs as part of their portfolio of fund choices, and they can offer customized, local suggestions for where to make grants. There are also single-issue charities that sponsor DAFs, which include universities, hospitals, and faith-based organizations.