Donor-Advised Funds – Origins, Benefits, and Who Should Use Them
In this episode of Coffee & Cash, we’re diving into one of the fastest-growing tools in charitable giving: the Donor-Advised Fund, or as some call it, DAF.
Maybe you’ve heard the term or know a friend who has one. But what exactly are they? Where did they come from? And why might you consider using one? In the next few minutes, we’ll cover their origins, why people might choose them, and who they’re best suited for.
Donor-advised funds have deeper roots than most people think. They first appeared in the 1930s through community foundations, such as the New York Community Trust in 1931, that wanted to give donors more control and flexibility in their charitable giving.
But the real turning point came with the Tax Reform Act of 1969. This law gave the concept of donor-advised funds recognition as a pooled common fund with favorable tax advantages and spelled out the rules around how they should operate.[1]
Fast forward to the 1990s, and financial giants like Fidelity, Schwab, and Vanguard stepped in. They launched national donor-advised funds, making them accessible to everyday investors, not just the ultra-wealthy.
Today, donor-advised funds hold tens of billions of dollars in assets and distribute record levels of grants each year. In fact, they’ve become a cornerstone of modern philanthropy.
So why are they so popular? Here are the top reasons individuals and families turn to DAFs:
First, tax efficiency.
You get an immediate tax deduction when you contribute to a donor-advised fund—even if you don’t make the grant to a charity until later. Plus, if you donate appreciated stock or other assets, you can avoid paying capital gains tax.
Second, flexibility and simplicity.
Sometimes, you want to give but don’t have time to research the right nonprofit right away. A donor-advised fund lets you separate the timing of your tax deduction from the timing of your charitable gift. And because everything runs through one account, it simplifies your recordkeeping.
Third, strategic giving.
A DAF allows you to plan your generosity over years, instead of rushing at year-end. Many families even use their funds to pass down values of generosity to the next generation.
And fourth, investment growth.
While the money sits in your donor-advised fund, it can be invested. This means your charitable dollars have the potential to grow tax-free while you decide which nonprofits you wish to deploy the funds to.
So, what sort of scenario would cause someone to consider a DAF?
High-income earners who want to offset taxable income in strong earning years.
Investors with appreciated assets—like stock, mutual funds, or even real estate—who want to give without triggering large capital gains.
Families who want a structured, long-term way to practice generosity together.
Entrepreneurs or business owners who’ve had a big liquidity event, like selling a company.
And honestly, anyone who donates to multiple charities each year and wants a simpler, more organized way to do it.
With all of that being said, here are the nuts and bolts: donor-advised funds combine tax efficiency, charity, and flexibility into a powerful giving tool. They’re not right for everyone, but if you want to maximize your impact, simplify your giving, and be more intentional about your philanthropy, a donor-advised fund might be worth considering.
References:
[1] Council on Foundations. Donor Advised Fund Timeline. Washington, DC: Council on Foundations, n.d. https://cof.org/sites/default/files/documents/files/DAF-timeline.pdf