An Analysis of Charitable Giving Using Donor Advised Funds

by Mrme487

Basic Reminders About Charitable Giving

Before diving in to some unique points about DAFs, I wanted to give a quick reminder about how charitable giving impacts your finances and taxes. If you’re familiar with this, please feel free to skip this section.

Giving money away to qualified charitable organizations (typically called 501(c)(3) organizations) allows you to claim a deduction for your contributions on your federal (and almost always state) tax return(s) for the year in which the donation was made. However, except in a small number of limited circumstances1, the benefit of this deduction is less than the amount of money you gave away (a deduction is worth $1 * your marginal tax rate – this is about $0.25 per $1 for an average person). This means that you shouldn’t give away money “for tax reasons” – the benefit you will receive is less than the amount of the donation.

Additionally, to receive any benefit from charitable donations, the sum of all your itemizable donations (mortgage insurance, property taxes, state income taxes, charitable contributions, and a few other less common items) must exceed the standard deduction ($12,000 for an individual or $24,000 for a couple). If your itemizable deductions are way below this threshold, charitable contributions won’t impact your federal taxes. However, if you are relatively close to this threshold, a Donor Advised Fund might actually help you make it across – see below for more detail on this (TL;DR – its a basic “bunching” strategy with a few twists).

What is a DAF? Are the Legal?

I like to think of DAFs as your own mini “personal foundation”. They are established as charitable organizations whose effective purpose is to store money that can be donated later to other charities (See here for a good overview). I’ll explain why this might be a good thing later, but for now think of them as a “middleman” – they hold onto your donation for a period of time and later donate the funds to a qualified organization of your choosing.

Importantly, making a donation to a DAF qualifies an individual to receive a tax deduction for the year in which the funds were donated to the DAF. This is true even if the money is left in the DAF across taxable years and only later distributed to a charitable organization.

After contributing to a DAF, individuals can then make a “recommendation”2 to the DAF to distribute the donated funds to various organizations. While there are some limits as to who/what can qualify to receive funds from a DAF, most charitable organizations will qualify and the overwhelming majority of DAFs are able to be used as the donor intends. In this way, a donor makes an initial donor to a DAF (receiving a tax deduction), and subsequently determines the use of the donated funds (but note, there is NOT a second tax deduction at this stage).

Donor advised funds are completely legal if run properly. However, in the past, their benefits have been abused by some individuals leading the IRS to issue more strict regulation on their use and limitations.

What are the advantages of a DAF?

  • Separates the timing of the tax deduction from the timing of the ultimate charitable gift – this allows donor to obtain an immediate tax deduction for a large contribution while disbursing this contribution over time.
  • Allows donations to grow tax-free while waiting to be dispersed (although no charitable donation is permitted for investment growth)
  • Allows a donor to “save up” to make a larger donation while still controlling the timing of tax deductions.

What are the disadvantages of a DAF?

  • The DAF charges an asset management fee (~0.60%) in addition to the expense ratio of the underlying investment.
  • Donor surrenders legal control over the funds (see footnote 2).
  • DAFs may have relatively high minimums to establish ($5,000+) as well as minimums on donations ($50+).
  • Paperwork/administrative complexity for both the donor and recipient organization (certainly not extreme, but worth mentioning).
  • DAFs are not exempt from the 50%/30% of AGI limitations on charitable contributions. This means that if you donate more than 50% of your AGI in cash (30% via appreciated stock), your excess charitable deduction will be carried over until the following year.

Suggested Tax Planning Strategies Using DAF

With the higher standard deduction under the TCJA, the incentive to “bunch” deductions is arguably higher than ever. Here, a DAF is an ideal choice – it allows an individual to “bunch” as many years of charitable deductions as a donor desires (subject to the 50% and 30% of AGI limits) yet distribute these gifts + interest over time. For individuals that donate a substantial amount to charity, a DAF may allow them to effectively engage in a strategy of bunching and maximize the value of their tax deductions over a multi-year period.

Further, as with any charitable donation, donating appreciated stock allows an individual to claim a deduction for the full value of the property donated while avoiding capital gains. However, a DAF may also be useful here – while it would be inefficient to donate $100-$500 of stock to different organizations, donating stock to a DAF in a lump sum allows an individual to recommend cash donations in smaller amounts to various charities, which reduces their administrative burden/brokerage fees.

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DAF and FIRE (mostly RE/fat RE)

Since I intended to cross post this to r/financialindependence, I wanted to highlight the potential of DAFs for FIRE minded individuals. The classic hallmark of a FIRE (specifically RE) individual is a high income during working years, a high savings rate, and a long period of relatively low taxable income in retirement. Thus, if charitable giving in RE is important to you, a DAF represents a unique planning opportunity – fund your DAF in your working years when tax deductions have a high value, and disperse the funds over RE when tax deductions have less/no value. In this way, you are effectively “harvesting” the benefit of charitable deductions in high tax years even though funds will not be distributed until low tax years.

Taken to the extreme, you could even consider the goal of “FIRE-ing” your DAF to provide donations in perpetuity3.

Comparison of Popular DAF Sponsors

As one might expect, Vanguard, Fidelity, and Schwab provide what are, in my opinion, the “best in class” DAFs. Importantly, these funds are run by legally distinct entities – i.e. Vanguard Charitable is distinct from Vanguard, etc…

The chart below summarized the key minimums/fees for each provider. My conclusion is that, currently, Fidelity is the best of the best.

Organization Minimum To Open Minimum To Add Donation / Recommendation Minimum Fees
Vanguard Charitable $25,000 $5,000 $500 0.60% + normal expense ratio; lower fees for balances > $500,000; $250 if under minimum (~$17,000)
Fidelity Charitable $5,000 Unclear; ~$50 $50 0.60% + normal expense ratio; lower fees for balances > $500,000; $100 minimum
Schwab Charitable $5,000 $500 $50 0.60% + normal expense ratio; lower fees for balances > $500,000; $100 minimum


Sorry, no TL;DR for you. I’m examining a complex topic here, and you really should invest the time to read it in detail if you are interested.

O.K. fine, but I warned you: A DAF is a “charity middleman” that lets you take a tax deduction today while distributing funds in the future. This lets you choose when to get a big tax deduction and can help you plan your taxes better.


1 In some cases, a charitable deduction actually can be justified solely on economic grounds. For instance, some states allow certain types of charitable contributions to be counted as a credit against your state taxes while still allowing you to claim an itemized deduction for such contributions on your federal return. This drives the cost of a charitable contribution down to a very low/potentially negative level. While these cases are rare, you should know that they exist. As examples, Arizona allows a $1 per $1 state tax credit (up to ~$1,000) for tax deductible donations made to certain private schools. Virginia allows an ~$0.60 per $1 state tax credit for tax deductible donations made to certain community based organizations. Especially given the TCJA’s limitation on SALT, reduction in state taxes may now even be able to be achieved without sacrificing any of the federal deductibility of SIT.

2 Note that to obtain a tax deduction, an individual must surrender control over the property/cash donated. Thus, legal ownership of the funds resided with the DAF once a donation is made. Donors do not control the ultimate disbursement of funds and instead merely act as advisers. While major DAFs are exceptionally good at honor a donor’s intention, you should understand that you have surrendered legal control rights upon transfer to a DAF.

This logic also helps explain the types of donations a DAF won’t make – basically any donation where you would receive a personal benefit (charity banquet ticket, etc…). Further, you should be careful when using DAF funds to fulfill a “pledge” that you’ve made. If the pledge represents a legally binding obligation instead of merely an intent to take a future action, a DAF may not be able to release the money to the organization. This can often be solved with wording – communicating to your charity of choice that you aren’t making a pledge but are instead including them in your planned future charitable giving.

3 Although note that DAFs are required, in the aggregate, to distribute ~5% of their assets per year. Thus it is possible that, if the fund as a whole fails to meet this target, the DAF might force you to distributed assets from your “account” with the DAF to help them meet this requirement. Currently, this does not appear to be an important constraint on popular DAFs with distribution rates well in excess of 5%.


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