A donor-advised fund (DAF) is a charitable investment account that allows donors to support their favorite charities with a single, tax-deductible donation. With DAFs, donors can distribute grants to their favorite charities over time, effectively pre-funding years of giving with assets from a single high-income event. This has been especially useful since the Tax Cuts and Jobs Act (TCJA) raised the standard deduction, leading to fewer households utilizing itemized deductions for annual charitable donations. Dr. Jennifer Lehman, chartered advisor in philanthropy (CAP) program director, Wallace chair in learning and philanthropy, and assistant professor, gives an example of a donor that used to give $10,000 per year to a favorite charity. With the higher standard deduction, this donation amount, while generous, is not enough by itself to warrant an itemized charitable deduction. If that donor can frontload three years’ worth of donations (assuming necessary liquidity), the donor can itemize the $30,000 charitable donation in year one, take the standard deduction in years two and three, and then start the process over again. At the same time, the donor can direct $10,000 per year (plus any DAF investment earnings) from the DAF to their favorite charity.
DAFs are typically offered by four primary types of organizations: DAF-specific platforms such as Charityvest, Daffy and National Philanthropic Trust; community foundations; financial institutions such as Fidelity Charitable, Vanguard Charitable and DAFgiving360 (formerly Schwab Charitable); and cause-specific DAFs that are focused on a specific charity or general cause such as the Jewish Communal Fund or Save the Children.
In a DAF, earnings from investments accumulate tax-free until the donor is ready to donate them to a charity. The sponsoring organization controls the money and investment options, but the donor can recommend which investments to use.
DAFs are philanthropy’s fastest-growing charitable option for giving, with more than 873,000 individual accounts in the United States, according to National Philanthropic Trust’s NPT’s 2023 DAF Report. DAFs have seen consistent growth in recent years, with contributions and assets reaching record highs in 2022. Contributions to DAFs in the U.S. in 2022 reached $86 billion. Over the past five years, DAF assets have grown more than 23% annually, on average, with DAF assets reaching $228.89 billion in 2022. DAF grantmaking has also grown significantly, with grant growth rates consistently outpacing individual giving growth rates since 2007. In 2022, charitable gifts paid out by DAFs reached $52 billion. A recent Barron’s report indicates that DAF owners are long-term, generous givers, even more so than those who give through other means.
Over the next 20 years, the silent generation and baby boomers are predicted to transfer $84.4 trillion in assets, with $72.6 trillion going to heirs and $12 trillion to charities. During this "Great Wealth Transfer," baby boomers are expected to pass down most of the wealth, with $53 trillion or 63% of all transfers, while the silent generation could pass down $15.8 trillion. As older Americans prepare to leave lasting legacies, and younger generations prepare to inherit substantial wealth and follow in the charitable footsteps of their predecessors, education around DAFs, stewardship of donors and preparing heirs to lead responsible, productive, generous and meaningful lives with their newfound wealth becomes indispensable.