The Pros and Cons of Donor-Advised Funds

Charitable giving can be a deeply personal decision. For many, philanthropy is about supporting causes that matter to their family and leaving a legacy that reflects their values. As you consider how to structure your philanthropy, you might hear about donor-advised funds, or DAFs.  

According to the yearly Donor-Advised Fund Report, historically published by the National Philanthropic Trust and now produced by the DAF Research Collaborative, DAFs have grown considerably throughout the past decade. The 2025 DAF report for fiscal year 2024 shows a 106% increase in national sponsors (99 vs 48) and a 356% increase in total contributions ($89.64 billion vs $19.66 billion) when compared to the 2015 DAF report for fiscal year 2014.  

While DAFs offer distinct advantages for charitable tax planning and administrative simplicity, they are not always the right fit for every donor. At 5280 Associates, we believe in transparency. You deserve to know the full picture, including the benefits and the costs, so you can decide if a DAF aligns with your broader financial plan. 

A common analogy for a DAF is a “charitable savings account.” It is a dedicated account established at a public charity (the sponsor) that allows you to make an irrevocable contribution of personal assets. 

The process generally works like this: 

▪︎ Give: You contribute cash, stocks, or other assets to the fund. You typically receive an immediate income tax deduction in the year you make the donation. 

▪︎ Grow: The funds can be invested, where they have the potential to grow tax-free. 

▪︎ Grant: You recommend grants to IRS-qualified public charities on your own timeline. 

This structure separates the tax event from the charitable distribution. You get the tax benefit now, but you can take your time deciding which charities to support later. 

As your financial picture evolves, the tools you use to support your favorite causes often need to evolve as well. Starting a donor–advised fund can serve as a bridge, allowing you to move from reactive, annual giving to a more proactive and structured approach. These funds offer distinct advantages that go beyond what is possible with traditional checkbook giving. Understanding these pros can help you see where a DAF might fit into your strategy. 

Potential DAF Tax Benefits

For many families, the goal is to help direct the maximum possible amount of wealth to the charity rather than being eroded by taxes. The tax efficiency of a DAF is often its primary selling point. By leveraging specific incentives within the tax code, you can potentially preserve more capital for your chosen causes.  

▪︎ Immediate Deduction: You receive a federal income tax deduction for the year you contribute, subject to IRS limitations. 

▪︎ Tax-Free Growth Potential: Once assets are in the DAF, any investment growth is generally not taxed. This means more money may be available for charities over time. 

▪︎ Capital Gains Bypass: This is often one of the most overlooked advantages. If you donate appreciated assets held for more than one year, you can generally deduct the full fair market value and potentially eliminate the capital gains tax you would have incurred if you sold the asset first. 

*Note: While these benefits can be significant, they are subject to strict IRS rules and asset irrevocability 

The DAF Bunching Strategy

Current tax laws have established a significantly higher standard deduction, with the One Big Beautiful Bill Act increasing the standard deduction to $15,750 for single or married filing separately and $31,500 for married couples filing jointly. As a result, many families may no longer be able itemize their deductions every year. A DAF allows for a strategy called “bunching.” 

Bunching charitable donations involves combining multiple years of planned charitable giving into a single tax year to exceed the high standard deduction threshold. You can contribute three years’ worth of giving into a DAF in year one to potentially increase your tax deduction and then distribute the funds to your favorite charities over the following three years. This is a common discussion point during our Proactive Tax Planning reviews. 

Reducing Friction

Donating complex assets to small charities can be difficult. A local animal shelter or food bank may not have the brokerage account or administrative capacity to accept a donation of stock or real estate. 

A DAF can help reduce this friction. You make one donation of the complex asset to the DAF sponsor, and the sponsor converts the asset into grantable funds. You can then recommend cash grants to multiple smaller charities from your fund. The DAF approach can help to simplify the paperwork for you and the charity.

When making a decision, financial or otherwise, one should not focus solely on the positives. From their fee structure to an irrevocable finality, DAFs come with limitations. By examining these possible drawbacks, charitable donors can position themselves as informed philanthropists.

The Total Cost of Ownership

While DAFs can offer significant advantages, they are not a cost-free solution. Looking beyond the tax deduction and evaluating the expenses required to maintain the account over time can help donors better understand the total cost of ownership. According to data from the National Philanthropic Trust, donors generally encounter two distinct layers of fees that can affect the long-term growth of their charitable assets: 

▪︎ Administrative Fees: The sponsoring organization charges a fee to administer the account, perform due diligence, and handle reporting. For standard accounts, these fees often start around 0.60% annually. 

▪︎ Investment Fees: Distinct from administrative costs, the underlying mutual funds or ETFs inside the account have their own expense ratios. These are assessed independently and vary based on the investment strategy selected, ranging from low-cost index funds to more expensive active strategies. 

If your goal is to donate cash and have it go to a charity immediately, a DAF could add unnecessary cost. In that scenario, writing a direct check may be more efficient.

Delayed Charitable Impact

A structural criticism of DAFs is the potential for warehousing wealth. While the donor receives an immediate tax deduction upon contribution, there is no legal requirement to distribute those funds to a working nonprofit within a specific timeframe. This creates a disconnect: the tax benefit is realized instantly, but the societal benefit is deferred. 

For donors focused on urgent causes, such as disaster relief or other humanitarian crises, this delay represents a real opportunity cost. A dollar sitting in a DAF investment account today is a dollar that isn’t providing services to the community today. If your primary goal is immediate impact rather than long-term endowment building, this structure introduces unnecessary friction compared to writing a direct check.

Irrevocability and Control

Once you contribute assets to a DAF, the transfer is irrevocable. You cannot take the money back if your financial situation changes. Additionally, while you retain “advisory privileges” to recommend grants and investment allocations, the sponsoring organization has legal control over the funds.

Some donors may leave their DAF assets in cash or a generic balanced fund without much thought. We believe your charitable assets should be managed with the same intentionality as your retirement assets. We apply our Bucket Allocation logic here: 

▪︎ Short-Term Bucket: If you plan to grant the funds within 12 months, we generally recommend keeping those assets in stable value options like money markets to help mitigate volatility. 

▪︎ Long-Term Bucket: If you are building a legacy fund to be distributed over 10 or 20 years, it may be appropriate to invest in equities to seek long-term growth potential, though this involves market risk and the potential for loss. 

Donor-advised funds can be powerful tools for managing tax liabilities and simplifying the administration of giving. They are particularly effective for bunching deductions and donating appreciated assets. However, they come with fees and rules that must be weighed carefully. 

At 5280 Associates, our goal is to support you as you evaluate your financial options. We work alongside your CPA, estate attorney, and tax professionals to review how a DAF interacts with your overall estate and tax picture. 

Are you holding appreciated stock or looking to bring more structure to your family’s giving? Let’s review your philanthropic goals to see if a donor-advised fund could fit in your portfolio.

NOTICE: This explanation is provided for informational purposes only and is not to be construed as or considered to be legal or tax advice. You should always consult your tax advisor with any and all questions regarding any all tax and tax related matters, including any questions that you may have concerning tax strategies described generally above. 

Thrivent Advisor Network and its advisory persons do not provide legal, accounting, or tax advice. Consult your attorney or tax professional. 

Some Donor-Advised funds are considered mutual funds and are sold only by prospectus. The prospectus will provide information on charges, risks, expenses, and investment objectives and should be reviewed carefully before investing. Investment companies can provide a prospectus, or you may prefer to ask your financial professional. Please read it carefully before you invest or send money.