Donor Advised Funds: A Charitable giving tool to consider
You've had a strong year (or perhaps charitable giving is important to you). Year-end is approaching, and you want to give in a meaningful way, not just tossing a check at the last minute. One tool gaining quick popularity is a donor-advised fund, or DAF, and it works like a charitable savings account you can invest and control.
Here's how it works
You open a DAF through a sponsoring organization (in our case, Schwab Charitable). You can make a contribution from cash, stock, or other assets and receive an immediate tax deduction for the full amount. Then, you can invest the funds or let them sit in cash depending on your timeline. From there, you recommend grants to the charities of your choice. There's no deadline. The money can sit and grow until you're ready.
One lesser-known advantage: you can invest the funds in your DAF account. Over time, they can grow, and you can gift far more over the years in perpetuity rather than just a one-time donation (similar to the way a foundation has historically operated).
Here’s an example: Let’s say you gifted 100k to your DAF. For assumption’s sake, let’s say you want to gift 4% a year and assume standard market growth of 7%.
Starting with $100,000, by year 25 the fund would have grown to about $203,753 (just before that year's distribution). Your 25th annual gift would be about $8,150 (up from $4,280 in year one, since the gift grows along with the balance).
After making that gift, the fund would still sit at roughly $195,603, meaning it nearly doubled even after 25 straight years of 4% distributions, because 7% growth outpaces a 4% draw. Over the full 25 years you'd have given away a cumulative total of about $150,434, which is already 1.5x your original principal, while still preserving the corpus.
A smarter tool for legacy planning
A DAF isn't just a tax strategy for today; it can also be a meaningful part of how you leave your mark. If your estate may be subject to taxes, contributing to a DAF during your lifetime can help offset that burden while ensuring the assets go to causes you care about rather than to the IRS. And unlike a one-time bequest in a will, a DAF lets you stay involved. You manage the account and recommend grants throughout your lifetime, then name successors — a spouse, adult children, or a trusted advisor — to carry on your giving after you're gone. Many families use this as a way to build a shared philanthropic legacy across generations, involving kids and grandkids in grant decisions along the way.
Three things to know before you open one
First, contributions are irrevocable — once money goes in, it's committed to charity. Second, grants from your DAF cannot go to individuals, satisfy a legally binding pledge, or pay for event tickets or gala tables. Make sure you check the list of charities available to ensure your donation can go to your desired place. Third, you can contribute appreciated stock and avoid capital gains tax entirely — often the smartest move of all.
If you give more than a few thousand dollars a year to charity, ask your advisor whether a DAF belongs in your financial plan.
Disclaimers: This is not tax or investment advice. Please be sure to consult with your investment and tax professionals regarding your personal situation.
