Using a Donor Advised Fund to Achieve Philanthropic Goals

Kevin K. Chung

Senior Financial Planner
First Republic Investment Management

November 4, 2015

A Donor Advised Fund (DAF) is a type of charitable giving vehicle that can help families and individuals meet philanthropic and tax planning goals.  It is a tax-advantaged investment account earmarked for charitable giving that allows a donor to maximize the value of a charitable deduction in a high-income year even if the donor has not yet decided upon the specific charities to be the ultimate recipients of their donations. Compared to a private foundation, a DAF is generally less expensive to operate, does not have annual distribution requirements, can grow tax-free without excise taxes, and can provide greater income tax deductions.  

For those considering a charitable giving strategy, there are several reasons to consider a DAF:

An Immediate Tax Benefit

A DAF allows a donor to separate the timing of a charitable tax deduction from the actual charitable donation. Because a contribution to a DAF is treated as a gift to a qualified public charity, a donor receives an upfront tax deduction in the year of a donation even though the final charitable distribution can be postponed to a later date.

For donors who experience a liquidity event that triggers a spike in taxable income, a contribution to a DAF in the same tax year as the liquidity event can provide the donor with an opportunity to maximize the tax benefits of a charitable donation.

A Testing Ground for Stewardship

Potential benefactors may be hesitant to commit significant sums to a chosen charity because they are concerned about an organization’s ability to use the donations effectively and efficiently.  By using a charitable intermediary such as a DAF, a donor can receive an upfront tax deduction and distribute funds to a chosen charity in increments while continuing to evaluate the charity’s stewardship before committing additional sums.  This strategy can give a donor more control over the use of charitable gifts and guard against organizational changes that may shift a charity’s mission away from the donor’s intent.  For example, if a chosen charity fails to demonstrate fiscal responsibility or no longer shares the donor’s intent, the donor can simply re-direct future DAF distributions to another charity.

A Conduit for Illiquid Assets

Many charitable organizations, especially smaller ones, are ill-prepared or unable to accept in-kind donations of non-cash assets, such as appreciated stock, high-end art collections, or shares in a privately-held company.  Many national DAF custodians, such as those run by large financial institutions, have the expertise to accept and process gifts of illiquid assets.  Using a DAF as a conduit for donating illiquid assets to smaller charities can increase a donor’s available gifting options and tax benefits.

A Vehicle for Family Philanthropy

A DAF can also offer donors and their families a centralized hub for recording and administering a lifetime of charitable activities.  For families that engage in philanthropy together, parents can use a DAF as a tool to teach their children about stewardship and intentional giving.  In addition, parents can name their children as successor advisors to the DAF and allow their children to inherit the ability to make grant recommendations.

An Option for Anonymous or In Memorandum Gifting

While distributions made from a DAF to a specific charity usually include the name of the granting DAF, donors can also choose to make grants anonymously or in memory of a loved one.  This feature gives donors the ability to selectively choose how a specific gift will appear to an organization – and, possibly, to the public.

DAFs can be a powerful planning tool for donors who are seeking both an upfront tax benefit and the flexibility to defer decisions on their ultimate charitable recipients.  As with any charitable gifting strategy, the use of a DAF should be tailored to meet your family’s unique philanthropic goals and financial situation.

This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein.

All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results.

Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that First Republic (or FRIM) does not provide tax advice. The levels and bases of taxation can change. Investors' tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document.

©First Republic Investment Management, 2015


This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein.

All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results.

Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that First Republic (or FRIM) does not provide tax advice. The levels and bases of taxation can change. Investors' tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document.

©First Republic Investment Management, 2015