Donor-Advised Funds (DAFs): What They Are and How They Work
Here's how donor-advised funds might help you cut your tax bill and give back to the community.
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What is a donor-advised fund?
A donor-advised fund (DAF) is an account into which you can deposit assets for donation to charity over time. A sponsoring organization (the DAF) manages the account, and you recommend how to invest the assets and where to donate them. The donor can also claim a tax deduction for making contributions to the fund.
How does a donor-advised fund work?
Once assets are deposited into a donor-advised fund, the sponsoring organization has legal control over them. But as long as you choose a charity that's recognized by the IRS as a U.S. charitable organization, the sponsoring organization will usually use your charities of choice.
NerdWallet Wealth Partners can create a personalized plan that evolves with you, from this tax season to the next chapter. Start by answering a few questions.
on NerdWallet Wealth Partners' site. For informational purposes only. NerdWallet Wealth Partners does not provide tax or legal advice.
Pros and cons of donor-advised funds (DAFs)
Bigger tax deduction now.
Lower capital gains taxes.
Possible reduced estate tax.
Helps form legacy of giving.
Anonymity.
Requires more upfront cash.
Can't get the money back once it's in the DAF.
There are fees.
Benefits of a donor-advised fund
In addition to providing financial support to charities, donor-advised funds have some notable financial benefits.
Bigger, more immediate tax deduction
You can claim a tax deduction in the year you contribute assets to the donor-advised fund rather than in the year the contribution goes to the charity. For example, if you typically donate $3,000 a month to charity ($36,000 a year), you could essentially prepay for, say, five years’ worth of donations by putting $180,000 in a donor-advised fund now.
The donor-advised fund would use the money to disburse $3,000 a month to the charity as usual, but you would get a $180,000 tax deduction this year instead of a $36,000 deduction every year for the next five years. If you had a high-earning year, are in a high tax bracket, or had a lot of taxable capital gains this year, getting a giant deduction in one year could be especially helpful.
In the 2025 tax year (the tax return you file by April 15, 2026), you have to itemize in order to deduct charitable contributions on your taxes. But the rules change for the 2026 tax year (this pertains to the tax return you file by April 15, 2027):
People who don't itemize on their tax returns can deduct up to $1,000 (single) or $2,000 (married filing jointly) in charitable contributions. This means they can take the deduction for the 2026 tax year on the tax return that they will file in 2027.
People who do itemize on their tax returns must donate an aggregate total of at least 0.5% of their adjusted gross income to charity in order to claim the deduction.
Lower capital gains taxes
You won’t pay capital gains taxes on assets you put in a donor-advised fund, and if you donate assets that are worth more than what you paid for them, you typically can deduct the current market value of the asset rather than what you originally paid for the asset.
Reduced estate tax
Few people have to pay estate taxes. The federal estate tax ranges from 18% to 40% and generally only applies to assets over $13.99 million in 2025 or $15 million in 2026. But if you’re one of those few, putting money in a donor-advised fund can reduce the size of your taxable estate and thus reduce your estate tax liability.
A legacy of giving
If you're doing some estate planning, you can make a bequest in your will so any remaining assets in your donor-advised fund are donated to your charities of choice after you die. There’s usually also the option to pass the assets to heirs so they can take the philanthropy mantle and give grants to charities they want to support.
Anonymity
Some individuals gravitate toward donor-advised funds because of the anonymity these funds can provide. You can choose to withhold your identity and gift grants anonymously if you don’t want to be solicited for future donations or don’t want your donations to become public knowledge.
What can you contribute to a donor-advised fund?
You don’t have to be wealthy to get into a DAF; some have low minimum contributions. Depending on the supporting organization and account type you choose, your minimal initial contribution could range anywhere from $0 to $100,000. You can contribute different kinds of assets to a donor-advised fund, such as:
Cash.
Stocks, bonds and mutual fund shares.
Private company stock.
Life insurance.
How to invest in a donor-advised fund
1. Compare DAF sponsoring organizations
There are many different kinds of sponsoring organizations. Commercial donor-advised funds, for example, are run by nonprofit arms of national financial services firms. We highlight three of them in the table below. As it shows, donor-advised funds make money from fees.
Fidelity Charitable | Schwab Charitable | Vanguard Charitable | |
|---|---|---|---|
Minimum initial contribution | $0. | $0 for Core accounts; $100,000 for professionally managed accounts. | $25,000. |
Minimum for additional contributions | $0. | $0. | $5,000. |
Minimum grant to charity | $50. | $50. | $500. |
Annual admin fee | Greater of 0.60% or $100 (tiered after $500,000). | 0.60% (tiered after $500,000). | 0.60% (tiered after $500,000). |
Investment fees | 0.015% to 0.89%. | 0.03% to 0.78%. | 0.01% to 0.59%. |
Maintenance fee | $0. | $0. | $250/year if below $25,000. |
2. Contribute cash or other assets to the donor-advised fund
You can put in cash, stocks or other investments, such as cryptocurrency or even your ownership in a private business. Note: Contributions are irrevocable, meaning that once you contribute the assets, you can’t get them out again (this is why DAFs can help reduce estate taxes; the money is no longer yours).
3. Itemize on your taxes to get the tax break
That means filling out Schedule A when you do your taxes and making sure that your itemized deductions exceed the standard deduction to get the most value for your donated bucks. You receive your tax break in the year you contribute to your donor-advised fund.
NerdWallet Wealth Partners can create a personalized plan that evolves with you, from this tax season to the next chapter. Start by answering a few questions.
on NerdWallet Wealth Partners' site. For informational purposes only. NerdWallet Wealth Partners does not provide tax or legal advice.
4. Help your donation grow
Although the sponsoring organization controls the money in the donor-advised fund and the investment options you choose from, you get to recommend which investments to use.
The assets in a donor-advised fund are then invested and can appreciate tax-free until you’re ready to donate them to your charity of choice. Unlike private funds, there is no mandatory distribution date for individual donors, meaning the funds could sit in the donor-advised fund for years before charities receive them. However, many providers have policies that require regular disbursements to charity.
What are the advantages of waiting to disburse funds to charities? Some people prefer to wait for the investments to mature so they can give a larger amount. Others want the tax deduction immediately but need time to select charities they want to give to.
5. Pick charities to support
That’s the goal of the entire process. You can support pretty much any IRS-qualified public charity.
Typically, the entity that sponsors the donor-advised fund is responsible for checking out charities to ensure that the money goes to legit ones.