A practical introduction to donor advised funds
A deep dive into DAFs, how they work, and why they matter for donors giving $10K–$75K a year
If your CPA has mentioned a donor advised fund, or a friend has recently opened one, you probably have a sense that this is something you may want to look into. If you’re like many – you probably haven’t had the time, or found a clear enough explanation, to understand exactly how a DAF actually works, whether it applies to someone at your wealth level, and what it might change about your tax situation.
This article is that explanation. A straightforward walkthrough of what a donor advised fund is, how the mechanics work, and what the numbers look like for someone giving $10,000 to $75,000 per year to charity.
What is a donor advised fund?
A donor advised fund – or DAF – is a type of charitable giving fund. It’s an account where you contribute assets, receive an immediate tax deduction, and can recommend grants to charities at a later date.
That’s the one-sentence version. Here’s the fuller picture.
A DAF is not a legal entity you create. It’s an account within a sponsoring organization – a national DAF sponsor, a community foundation, or a single-issue charity. You open the account, contribute cash or other assets, and the sponsoring organization holds those assets on your behalf. You retain advisory privileges over two things: how the assets are invested and which charities receive grants.
The contribution is irrevocable. Once you put money into the DAF, it’s committed to charitable purposes – you can’t take it back. However, you retain functional control over every investment decision and every grant recommendation. In practice, over 99% of grant recommendations are approved by sponsoring organizations.
There’s no requirement to distribute by any specific date. You can contribute this year and recommend grants next year, or five years from now, or on a recurring monthly schedule. The timing is entirely yours.
How does a donor advised fund work?
Contribute. You fund the account with cash, publicly traded stock, or – at some sponsors – other assets like cryptocurrency, real estate, or private company shares. Each asset type has different tax treatment, but the core benefit is the same: you receive a tax deduction in the year you contribute. For cash, the deduction limit is 60% of your adjusted gross income (AGI). For appreciated securities held longer than one year, the limit is 30% of AGI – but you receive the deduction at full fair market value with no capital gains tax on the appreciation (see IRS Publication 526 for the full deduction rules). At an income level of $500,000 or above, a $60,000 stock contribution generates a deduction worth roughly $21,000 in federal tax savings alone.
Grow. Once assets are in the DAF, they’re invested according to your chosen allocation – typically from a menu of 5 to 15 options ranging from conservative to aggressive. The important thing: all growth inside the DAF increases the total value available for future grants, with no capital gains, dividends, or income taxes generated along the way. A $60,000 contribution invested at 7% annually grows to approximately $70,000 in two years – meaning $10,000 more is available for the charities you support than what you originally put in.
Grant. When you’re ready to support a charity, you recommend a grant through the sponsoring organization’s platform – usually online, processed within one to five business days. You can direct grants to any IRS-qualified 501(c)(3) public charity — the sponsoring organization, which meets the statutory definition under Internal Revenue Code Section 4966, verifies eligibility before processing each grant. You can grant anonymously or with your name. You can set up recurring grants. And minimum grant amounts are typically $50 to $500, depending on the sponsor.
Who uses donor advised funds?
If you assume DAFs are for people with $20 million and a team of advisors, you’re not alone, but you are also incorrect. There are now over 3.5 million DAF accounts in the United States, and the vast majority are held by individuals and families with $1 million to $10 million in net worth. The median account balance at the largest national sponsor is approximately $23,500.
Minimum contributions to open an account start as low as $0 at some sponsors. Others require $5,000 or $10,000. Either way, these are not exclusive vehicles reserved for the ultra-wealthy. They’re practical tools that financial advisors now routinely recommend as part of standard tax and wealth planning – particularly for households that give consistently and have appreciated assets in their portfolios.
DAFs have grown 18% year over year across the industry. In 2024 alone, DAF donors recommended $65 billion in grants to charities (DAF Research Collaborative, 2025 Donor-Advised Fund Report). This is not a niche strategy. It’s how a large and growing share of American charitable giving is structured.
How much can I save with a donor advised fund?
This is where the math gets personal. If you’re giving $10,000 to $75,000 annually to charity, you’re generous – but you may not be giving efficiently. Here’s what that means in dollar terms.
Without a DAF: Say you donate $62,000 in cash to 6 different organizations, mostly in November and December. You itemize your deductions. At the same time, you’re also selling appreciated stock in your brokerage account to rebalance – and paying capital gains taxes on every share you sell. The cash you donate to charity comes from your bank account. The stock you sell generates a tax bill. These are two separate transactions that could have been one.
With a DAF: Instead of selling stock and donating cash, you contribute $62,000 of appreciated stock directly to a DAF. No sale event occurs. No capital gains tax is triggered – not federal, not state, not the 3.8% Net Investment Income Tax (see IRS Topic No. 559). You receive a charitable deduction for the full fair market value of the stock. The DAF sells the shares tax-free internally and invests the proceeds. You recommend grants to the same 6 charities on the same schedule. The charities receive the same support. Nothing changes for them. Everything changes for your tax return.
How much does a donor advised fund cost?
“This is for people with $20M+.” No. The sweet spot for a DAF is exactly where you are: giving enough that inefficiency costs real money, but not so much that you need a private foundation with its own staff and legal structure. Donors with $2 million to $10 million in net worth are the core DAF demographic.
“I lose control of the money.” You lose legal ownership – the contribution is irrevocable. However, you retain functional control over how the assets are invested and which charities receive grants. In practice, you direct every dollar.
“It’s complicated.” Opening a DAF account takes 10 to 15 minutes online. The complexity is in the strategy – deciding when to contribute, which assets to contribute, and how to time your grants. The vehicle itself is simple.
“It’s expensive.” Historically, DAF sponsors charged 0.6% to 1.0% of assets annually in administrative fees. On an $80,000 account, that’s $480 to $800 per year. However, the market has evolved: several sponsors now charge zero administrative fees. When there is no fee, every dollar you contribute goes directly toward future grants with no annual drag on the account balance. Underlying investment fees (typically 0.05% to 0.50%) apply regardless of sponsor, but these are comparable to what you’d pay in any investment account.
“I should just set up a private foundation.” A private foundation gives you more control but requires legal setup, a board, annual 5% payout mandates, excise taxes on investment income, staffing, and IRS Form 990-PF filings. For someone giving $10,000 to $75,000 per year, a DAF delivers the core tax benefits with none of that overhead. If your annual giving eventually reaches $500,000 or more and you want to run programs directly, a foundation may make sense – but at this level, a DAF is almost certainly the more practical vehicle.
How much tax do I save by donating stock to a DAF?
Let’s put real numbers on it. David and Katherine contributed $62,000 to charity last year, all in cash, all in December. They itemized their deductions. That same year, David sold $62,000 of company stock – shares from RSU grants with a cost basis of $18,000 – to rebalance his portfolio.
That sale triggered approximately $8,270 in federal capital gains and Net Investment Income Tax on the $44,000 gain (at a combined 18.8% rate; see IRS Topic No. 409 for current capital gains rate schedules), plus approximately $2,180 in Illinois state income tax (at 4.95%). Total taxes on the gain: roughly $10,450.
If David had contributed that stock directly to a DAF instead of selling it and donating cash, he would have avoided the entire $10,450 in capital gains taxes – and still received the full $62,000 charitable deduction at fair market value. The charities would have received exactly the same grants on exactly the same schedule.
Over a two-year period, that’s approximately $21,000 in avoided taxes – from the same giving, to the same charities, on the same schedule. The only thing that changes is the form of the contribution.
| A note on 2026 tax rules: New federal rules now in effect under the One Big Beautiful Bill Act (Public Law 119-21) introduce a 0.5% AGI floor on charitable deductions and cap the tax benefit at 35 cents on the dollar for the highest bracket. For a household with $450,000 in AGI, the first $2,250 in charitable contributions produces no deduction. These changes make strategic charitable planning – including appreciated stock contributions through a DAF – more important, not less. |
What to Do Next
If you want to see how the math would look for your specific situation, this is a good topic to raise with your CPA or financial advisor. The question to ask: “Should we be contributing appreciated stock instead of cash – and how much could we save in capital gains taxes if we did?”
In the next article in this series, we’ll walk through exactly how each phase of a DAF works – what you can contribute, how the investments are managed, and what the grant process looks like.
This article is for educational purposes only and does not constitute tax, legal, or financial advice. Consult your CPA or financial advisor before making charitable contribution decisions.
Sources
IRS Publication 526, Charitable Contributions. https://www.irs.gov/forms-pubs/about-publication-526
One Big Beautiful Bill Act (Public Law 119-21). https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions
Internal Revenue Code Section 4966 — Donor Advised Fund statutory definition. https://www.law.cornell.edu/uscode/text/26/4966
IRS Topic No. 409, Capital Gains and Losses. https://www.irs.gov/taxtopics/tc409
IRS Topic No. 559, Net Investment Income Tax. https://www.irs.gov/taxtopics/tc559
DAF Research Collaborative, 2025 Donor-Advised Fund Report. https://www.dafresearchcollaborative.org/annual-daf-report/2025