If you’re intrigued by the idea of investing in a donor-advised fund (DAF), you’re not alone. Due to their simplicity and flexibility, DAFs are among the fastest-growing charitable giving vehicles in the U.S. among all Americans, not just the wealthy. At their core, DAFs are investment accounts that can only be used for charitable giving. While the money in the fund is owned and managed by a financial firm, DAF donors still have a say in how and to which nonprofits the assets are distributed.
A simple, flexible, and tax-advantaged way to give to your favorite charities
Community foundations and Jewish federations were among the first to offer DAFs in the 1930s. And in the ensuing years, DAFs have become increasingly popular ways for individuals and families to support charitable causes. According to the 2024 National Study on Donor Advised Funds, nearly half of all DAFs (49%) had total assets at the end of 2021 of less than $50,000, with contribution amounts ranging from $10,000 to $49,000 – making DAFs a mid-range philanthropic vehicle.1,2 In 2024, donors contributed $89.64 billion, (the largest annual total to date).3
Donors take tax deductions, avoid capital gains
When you contribute cash, securities, or other assets to a DAF, you are generally eligible to take an immediate tax deduction. Those funds can be invested for tax-free growth, and you can recommend grants to any eligible IRS-qualified public charity. A DAF is easy to set up and maintain, with just three simple steps:
- Make a tax-deductible contribution. Easily donate cash, appreciated stock, or non-publicly traded assets to your DAF, which is maintained and operated by a section 501(c)(3) sponsoring organization.
- Grow your donation, tax-free. Your donation can potentially grow, making more money available for giving. Most sponsoring organizations have a variety of investment options based on your projected time horizon.
- Grant when you’re ready. You can support public charities, causes, or initiatives that align with your passions or meet emerging needs through grant recommendations from your DAF. The public charity sponsoring your account will conduct due diligence to ensure the funds granted go to an IRS-qualified public charity and are used for charitable purposes. If privacy is a concern, you can give anonymously. DAF sponsors handle all due diligence and reporting, eliminating the need for you to maintain records of annual donations.
DAFs offer tax advantages to many donors
Because DAFs aren’t required to annually distribute a percentage of assets, they have been particularly attractive to high-net-worth individuals. However, DAFs extend the opportunity for tax advantages to all donors. Assets put into a DAF today can potentially grow in value and earn interest and investment dividends into the future with no tax consequences while helping to increase your dollars for making charitable contributions. As soon as you make a charitable DAF contribution, you are eligible for an immediate tax deduction. Although some limits do apply:
- If you donate cash, via check or wire transfer, itemizers are generally eligible for an income tax deduction of up to 60% of your adjusted gross income. However, beginning Jan. 1, 2026, taxpayers in the highest 37% tax bracket will see their deduction rate capped at 35%.
- Donating long-term appreciated securities directly to charity – instead of liquidating the asset and donating the proceeds – can help maximize your tax benefit and the overall amount you grant to charity. You are also eligible for an income tax deduction of the full fair-market value of the asset, up to 30% of your adjusted gross income. By donating appreciated stock directly to your DAF, you can potentially eliminate capital gains tax on those appreciated assets, provided they’ve been held for more than a year. But keep in mind the new changes for 2026:
- A new 0.5% AGI floor applies to all charitable deductions. You can only deduct amounts above this threshold. For example, if your AGI is $200,000, the first $1,000 of charitable gifts (including appreciated stock) is not deductible.
- For high earners, the value of deductions is capped at 35% (down from 37%).
- Non-itemizers get a new above-the-line deduction for cash gifts — but DAF contributions do NOT qualify for that benefit.
- Consider “bunching” donations you’d typically make over a period of time in a single instance or installment. This strategy can help you maximize your itemized deductions in one year and is especially effective if you’re on the cusp of itemizing deductions.
The One Big Beautiful Bill and the importance of coordinating charitable and estate planning
The new legislation, known as the One Big Beautiful Bill Act, raises the estate and gift tax exemption to $15 million per individual ($30 million per couple). This means that fewer estates will face federal estate tax, and creates an opportunity to align charitable giving with estate planning. By making lifetime gifts now — to DAFs or other charitable vehicles — you can help reduce your taxable estate, gain immediate tax benefits, and preserve flexibility in your philanthropy.
A popular choice for retirees and during years when income is higher than usual
DAFs are an attractive option for anyone who practices charitable giving, but there are several benefits that may make them a wise choice for those nearing retirement. For instance, if you’re in your peak earning years, gifting highly appreciated stock to a DAF may provide a tax deduction while avoiding capital gains. In addition, when you’ve set money aside in your DAF during your working years, some – or maybe even all – of your charitable giving can continue without any new funding.
Pass on the spirit of philanthropy – and the means to carry it out – to the next generation
As you contemplate your estate planning, you may want to recognize and give to some charitable organizations or philanthropic causes that have made an impact on your life. And you may want to encourage the beneficiaries of your estate to continue the legacy of charitable giving that you have maintained during your lifetime. A DAF provides a convenient way to continue a legacy of charitable giving while helping to ensure a smooth transition of wealth.
Donor-Advised Funds FAQs
What is a donor-advised fund?
A donor-advised fund, or DAF, is a simple, flexible, and tax-advantaged way to give to your favorite charities.
What are the tax advantages?
DAFs can offer tax advantages, helping to reduce estate taxes and maximize the assets passed to heirs.
Can my children be involved?
Yes. Your children can be named as advisors and successor advisors to your account and can legally assume these roles once they reach the age of 18.
Can I name multiple successor advisors?
Yes. If you designate more than one successor advisor, your account will be divided into separate new accounts — one for each successor. Each person you name will have advisory responsibilities for the respective account created from your original DAF assets.
Can my DAF exist in perpetuity?
Yes. Designated successor advisors can manage accounts created from your original assets. They can also name their own successors, who will continue the advisory role on accounts formed from those assets. This process can be repeated for generations.
For more information on how a DAF might align with your philanthropic, retirement, and estate planning goals, contact your wealth advisor. If you’re not already a Mercer Advisors client, let’s talk.
