Broker Check
Create a Donor-Advised Fund to Establish a Charitable Legacy and Reap Tax Benefits

Create a Donor-Advised Fund to Establish a Charitable Legacy and Reap Tax Benefits

September 27, 2021

This is a guest article that was written by Jennifer R. Hallos, Esq., CPA, M.Tax; Principal at McCarthy, Lebit, Crystal & Liffman Co., LPA

If you wish to have a lasting impact for charitable giving, you may want to create a donor-advised fund (DAF). A DAF is a private investment fund or account that is administered by a third party to manage charitable donations.

Dating back to the 1930s, DAFs became popular with wealthy families and individuals in the 1990s. They gained official recognition with the passage of the Pension Protection Act of 2006 which defined DAFs for the first time and instituted Internal Revenue Code (IRC) rules for their use. Today, DAFs are the fasting growing philanthropic investment vehicles.

A DAF is considered a type of public charity for tax purposes and thus receives preferential tax treatment. Some of the key advantages of DAFs include:

  • Donations made to public charities (including DAFs) enable the donor to take a tax deduction of up to 60% of their adjusted gross income (AGI) for that tax year.
  • When a donor makes a contribution to a DAF, they can take an immediate tax deduction for it, even if the funds are not distributed during that tax year.
  • The donor may have as much or as little control over the DAF as they choose. Often times, the donor chooses to have control over the substantive decisions, but allows the third-party manager to handle the administrative tasks such as annual reporting and tax returns.
  • The donor decides how to invest funds and when to make the grant or distribution to the charities of their choice.
  • Funds can stay in the DAF for an indefinite period of time and grow through wise investing, multiplying the impact of the initial donation.
  • Once a DAF is established, donors can continue to contribute each year and reap tax benefits on an ongoing basis.
  • A DAF is outside of the donor’s taxable estate at death, so donations made to the DAF will pass to the charity tax-free.

In contrast, private foundations are subject to much stricter IRS rules than DAFs. Private foundations must distribute at least 5% of their income each year and stricter rules apply to the types of investments in which a private foundation may or may not invest. Private foundations only allow a tax deduction of up to 30% of AGI for cash and only 20% of AGI for long-term publicly-traded appreciated securities. Private foundations also can be more costly to administer as they require the services of lawyers, accountants, and investment advisors.

DAFs are held at many institutions, such as investment houses like Fidelity, banks and financial institutions, large charities such the American Cancer Society or the American Heart Association, and community foundations such as the Cleveland Foundation. Each organization has its own rules for minimum annual distributions, investments, and administration fees. A DAF can be funded with cash, stocks, bonds, mutual funds, property, real estate, closely-held businesses, restricted stocks, non-qualified deferred compensation, and cryptocurrencies such as Bitcoin.

DAFs do have some disadvantages, but the pros tend to outweigh the cons. As mentioned, the  holding institution charges administration and investment fees for the DAF which would not occur with a direct donation to a charity. Some organizations require a minimum initial contribution to establish a DAF and a minimum amount for annual distributions. Because a DAF is an investment fund, it brings investment risks and the rare possibility of bankruptcy due to market downturns or mismanagement.

If you are thinking about creating a DAF, keep the following considerations in mind:

  • Gather information on the institution that would manage your DAF, just as you would when engaging an attorney or accountant. Look at its history and length of experience in offering DAFs.
  • Interview the organization’s representative to see if it fits with you and your family’s values and personality.
  • Check annual maintenance and administration costs, as well as minimum requirements for account balances and distributions.
  • Ask about the institution’s investment philosophy and investment options, and ask if you can have your own investment advisor (JK Investments) manage the investments for you.

Establishing a DAF can create a legacy of charitable giving for you, your family, or business. Involving children and grandchildren in the creation of the DAF and the fund decisions ensures your philanthropic wishes will extend for years to come.

JK Investments frequently helps clients establish DAFs with Fidelity’s charitable foundation, Many of our clients have custodial accounts with Fidelity for their investments, so it’s easy to establish a DAF and make contributions. With a DAF at, we can continue to manage the investment of your DAF for you and provide advice to help your DAF grow. And once a DAF is established, we can advise you and your heirs and manage the fund in perpetuity according to your wishes. Contact me or your wealth advisor for more information on creating a legacy with a DAF.

Securities offered through Regulus Financial Group, LLC. Member FINRA/SIPC. Investment advisory services offered through Regal Investment Advisors, LLC, an SEC Registered Investment Advisor. Registration with the SEC does not imply any level of skill or training. Regulus Financial Group, LLC and Regal Investment Advisors are affiliated entities. JK Investment Group is independent of Regulus Financial Group, LLC and Regal Investment Advisors.