A Better Way to Give? When a Donor Advised Fund Makes Sense

Charitable giving is as personal as it is financial. Some people give quietly, others make philanthropy part of their identity, and many want to know their dollars are making a difference. No matter the motivation, there’s usually another factor at play—taxes. If you find yourself giving regularly or in larger amounts, you may have heard about donor-advised funds (DAFs). They’ve become one of the fastest-growing tools for charitable giving, but should you use one?

What Is a Donor Advised Fund?

Think of a DAF as a charitable account. You contribute money or appreciated assets, take the tax deduction right away, and then recommend grants to charities over time. It’s like hitting pause on your giving—you lock in the tax benefit now, but can decide later which organizations to support.

For people who give to multiple charities, this can simplify life. Instead of keeping track of a shoebox full of donation receipts at tax time, you make one contribution to your DAF. From there, you direct gifts to charities whenever you’re ready.

Why DAFs Appeal to Donors

There are several reasons people turn to DAFs:

Timing flexibility

If you’ve had a big income year—sold a business, received a sizable bonus, or cashed out of an investment—you might want the tax deduction now, but don’t want to rush your charitable decisions. A DAF allows you to contribute today and take your time deciding where the money goes.

Donating appreciated assets

One of the most substantial advantages is contributing stock or mutual funds that have grown in value. If you sell, you’ll owe capital gains tax. If you donate directly to a DAF, you avoid the tax and get a deduction for the fair market value. That’s a win for you and a bigger win for the charities.

Example: Let’s say you bought $10,000 worth of stock years ago that’s now worth $50,000. Selling it would create $40,000 in taxable gains. Giving it to a DAF means you deduct the full $50,000 and avoid the capital gains bill entirely. The charity receives more, and you keep the IRS out of the transaction.

Legacy planning

A DAF isn’t only about today. You can name beneficiaries, set up a schedule of future gifts, or appoint your children as successors to continue giving in your honor. For many families, it becomes a way to pass along both assets and values.

Anonymity if you want it

Some donors prefer to keep a low profile. A DAF lets you make grants without your name attached. This can be beneficial if you prefer not to receive a large number of donation requests after your information is added to a charity’s database.

When a DAF Might Not Be the Right Fit

DAFs aren’t perfect for every situation.

• If your giving is small or occasional, it may be simpler to donate directly.

• Contributions to a DAF are irrevocable. Once you put money or assets in, you can’t take them back. While sponsoring organizations almost always follow your grant recommendations, technically, they have the final say.

• If you want your charitable plan to provide income for you or your family—through something like a charitable remainder trust—a DAF won’t do that.

  
  

In short, a DAF is best for people who want structure, efficiency, and tax-smart giving. If your donations are more casual, it may be more effort than necessary.

The Tax Angle

Let’s be honest—taxes often drive these decisions. A DAF offers two significant advantages:

Immediate deductions. You get the deduction in the year you contribute, even if you spread out grants to charities over future years.

Bunching contributions. If you usually take the standard deduction, you might not get a tax break from annual giving. By combining several years of gifts into one enormous DAF contribution, you may cross the threshold for itemizing and unlock bigger deductions.

Take a couple who give typically $10,000 a year. On its own, that amount doesn’t push them past the standard deduction. But if they contribute $40,000 to a DAF in one year—covering four years of giving—they can itemize that year, take the full deduction, and still distribute $10,000 annually to charities.

A Practical Example

Consider John and Maria, who give regularly to local charities. One year, John sells a rental property and faces a steep tax bill. Instead of making their usual $12,000 in donations, they contribute $60,000 of appreciated mutual fund shares to a DAF.

The result? They get a significant deduction in that high-income year, avoid the capital gains tax on the shares, and now have several years of charitable giving pre-funded. Each year, they recommend grants from their DAF, just as before—but with less tax drag and less paperwork.

More Than Numbers

While the tax benefits are compelling, DAFs also make giving more deliberate. Families can use them as a way to engage children in philanthropy, holding yearly discussions about which causes to support. It turns into a tradition, not just a transaction.

And from a practical standpoint, the simplicity is hard to beat. A few clicks online, and the grant is on its way: no checkbook, no envelopes, no duplicate receipts to track down in April.

Final Thoughts

So, should you use a donor-advised fund when giving to public charities? If you give regularly, hold appreciated investments, or want more flexibility in your charitable planning, a DAF can be a powerful tool. If your giving is modest, occasional, or tied to different financial goals, donating directly may be the better choice. In the end, a DAF is like a well-designed tool in your financial toolbox. You won’t need it for every job, but when the situation calls for flexibility, efficiency, and tax smarts, it fits perfectly.

And unlike most financial strategies, this one comes with a feel-good bonus: knowing you’ve made a difference while keeping Uncle Sam from taking a bigger cut than necessary.

WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen. 

Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.