About

Resources

Donate

News & Events

Articles & Perspectives

Contact

Login

How Does a Donor Advised Fund Work?

Jan 02, 2025

featured image

Donor advised funds (DAFs) have long been a cornerstone of accessible, flexible charitable giving. They allow high-net-worth individuals and families to make a lasting impact on the causes they care about most while reaping significant financial benefits themselves. 

You’ve probably heard a lot about the benefits of giving to or founding a DAF, but you’re likely still wondering, “How does a donor advised fund work? And what can it do for me?” Greater Houston Community Foundation acts as a philanthropic partner, amplifying the giving potential of all donor advised funds. We’re going to talk about DAF structure, how they work, and their essential role in charitable giving. 

Continue reading about all things donor advised funds, or call Greater Houston Community Foundation at 713-333-2210 to get started with giving. 

Key Insights

  • Donor advised funds (DAFs) offer tax benefits, flexibility, and streamlined recordkeeping, making them a popular tool for strategic and impactful charitable giving.
  • Contributions to DAFs, including cash, securities, real estate, and other non-cash assets are irrevocable. However, donors maintain advisory privileges over grant recommendations and investment strategies.
  • DAFs allow tax-free investment growth, enabling donors to potentially amplify their philanthropic impact over time while enjoying immediate tax deductions.
  • While DAFs can simplify giving and legacy planning, they have limitations, which can include administrative fees, reduced donor control, bifurcated gifts, and concerns about transparency and fund distribution pacing.
  • The popularity of DAFs has grown due to their ability to accommodate and integrate into advanced tax-planning strategies.

Table of Contents

What is a donor-advised fund?

What is a donor advised fund? At its most basic, a donor advised fund is a charitable investment account designed to support nonprofit organizations and causes. It allows donors to make charitable contributions, receive immediate tax deductions, and recommend grants to charities over time. This allows donors to stay involved in their charitable giving without having to manage or distribute the funds themselves.

The inherent flexibility of the DAF structure has made them an increasingly popular choice for donors looking to maximize the impact of their philanthropic efforts, as they take into consideration the complexities and nuances involved in their overall giving strategy.

DAFs provide a streamlined way for everyone to engage in charitable giving that encourages efficiency, allowing them to maximize their impact and the benefits of giving. 

How does a donor advised fund operate?

Donors first must contribute assets to a fund, whether establishing a new fund or contributing to an existing one. These assets can include cash, publicly traded securities, real estate, or other non-cash assets—but all contributions are irrevocable, which means they cannot be withdrawn after donation. 

Who owns the money in a donor advised fund? 

Although donors relinquish ownership of the assets they contribute to the fund, they do retain advisory privileges for the fund. This means they can recommend grants to eligible charities of their choice, providing flexibility on how and when funds are distributed.

Once the account is funded, it’s time to make and recommend grants. This is where sponsoring organizations like Greater Houston Community Foundation come in. DAFs are administered by sponsoring organizations, often community foundations, financial institutions, or other charitable entities. These organizations manage the funds, ensure compliance with legal requirements, and facilitate grantmaking on behalf of donors.

Continue reading about contributing non-cash assets:

How donor advised funds work: a step-by-step process

There are essentially four steps in donating to and seeing results from a donor advised fund. 

  1. Establishing a fund. First things first, select a sponsoring organization to administer your DAF. Organizations like the Foundation will handle all of the fund’s administrative and investment responsibilities. 
  2. Contribute. Contributions to the fund can be made in the form of many gift types, including cash, stocks or securities, real estate, business interests, or other (non cash) complex assets. 
  3. Investment of funds. Once assets are contributed, they are invested based on your preferences, guided by the investment options provided by the sponsoring organization. These options are designed to align with various risk tolerances and investment goals, allowing you to tailor your investment strategy to meet your individual needs. Although the funds are no longer yours, at the Foundation you can choose one of four asset allocations based on your needs and risk tolerance or for accounts with balance over $500,000 you can utilize your preferred investment advisors.   
  1. Grantmaking. You then recommend grants to the charities you are most passionate about, specifying the amount and timing of distributions. The sponsoring organization will review your recommendations, ensure compliance, and distribute the grant dollars. At Greater Houston Community Foundation, donors can access DonorSphere, a portal through which you can easily access fund information anytime, anywhere. Our user-friendly platform empowers you to recommend grants seamlessly, ensuring your charitable contributions make a meaningful impact

It should be noted that donors aren’t required to distribute funds immediately, which allows you to strategically plan your giving. This flexibility is one of the features that makes DAFs such a powerful financial and estate planning tool and enabling a donor to plan and meet their short- and long-term philanthropic goals. 

Donor advised funds pros and cons

While giving to a donor advised fund is a net-positive investment for almost any donor looking into philanthropic financial planning, there are some caveats to be aware of. 

What are the benefits of a DAF?

Some of the most important benefits of donor advised funds include:

  • Tax benefits. Donors receive an immediate tax deduction when they contribute to a fund. Additionally, donating appreciated assets can help donors lower capital gains and maximize the value of their contributions.
  • Bunching. DAFs are one of the most popular tax strategies for charitable giving.  Bunching charitable donations allows donors to “bunch” multiple years of charitable contributions into one tax year, allowing them to surpass the standard deduction threshold.
  • Flexibility. Donors can decide when and where to distribute funds, providing an opportunity to respond to emerging needs or change priorities when needed. 
  • Investment growth. Funds in a DAF can grow tax-free, potentially increasing the total amount available for charitable giving and exponentially amplifying impact over time. 
  • Simplified recordkeeping. DAFs consolidate all charitable giving into a single account, simplifying tax reporting and administrative responsibilities for donors.
  • Enhanced legacy planning. DAFs can be a valuable tool for legacy planning, allowing donors to involve their families in charitable decisions and pass on their philanthropic values to future generations.

What are the disadvantages of a DAF?

While donor advised funds offer an easy and flexible way to make a difference, it’s important to be aware of potential drawbacks. 

  • Fees and expenses. Sponsoring organizations typically charge administrative and investment fees, which can increase based on the size of the fund and the complexity of investments.
  • Limited control. Once assets are contributed to a DAF, they become the property of the sponsoring organization. Donors can only recommend, not mandate, distributions.
  • Bifurcated gifts. The IRS has strict rules when it comes to DAFs and event tickets for charitable fundraisers. Specifically, they prohibit DAFs from covering any part of an event ticket, even if a segment of the ticket price is deemed tax-deductible.

Are donor advised funds 100% deductible?

In general, contributions to donor advised funds are 100% tax deductible within the boundaries of overall IRS limits. 

Donor advised fund tax deduction limits change based on the type of assets contributed to the fund; while cash contributions are deductible up to 60% of AGI, appreciated securities are only deductible up to 30% of AGI.

Because current tax laws so often favor itemization of deductions for those with high AGI, donor advised funds have grown even more popular over the previous years. The IRS allows you to carry over your charitable contributions for up to five tax years if they exceed AGI limits in any given year. 

Looking to get started with donor advised funds? Greater Houston Community Foundation can help.

Most donors wondering, “How does a donor advised fund work?” will find solace in the knowledge that most of the nitty-gritty details are taken care of by a chosen sponsoring organization like the Foundation. If you want to align your charitable giving plan with your overall finances and estate, donor advised funds are a powerful tool waiting to be utilized. 

At Greater Houston Community Foundation, we pride ourselves on being your dedicated philanthropic partner, equipped with deep local knowledge and expertise. Our mission is to understand your unique values and aspirations, allowing us to provide tailored assistance in navigating the complex landscape of charitable giving. We can help you identify the causes and organizations that resonate with your philanthropic vision, ensuring that every contribution you make has a meaningful impact.

With our extensive network and understanding of the Greater Houston area, we’re uniquely positioned to connect you with initiatives that align with your interests and needs of the community. Whether you’re passionate about education, health, the arts, or social justice, we work alongside you to craft a viable charitable giving plan that reflects your goals and maximizes your philanthropic impact.

Together, we can transform your ideas into action, leveraging our expertise to help you make informed decisions and create a lasting legacy. At the Foundation, your vision for giving is our priority, and we are committed to being with you every step of the way.

If you’re ready to get started with DAFs, call the Foundation at 713-333-2210 or reach out directly. We work with your existing professional advisors to integrate strategic, fit-to-purpose charitable solutions.

More Helpful Articles by Greater Houston Community Foundation: 

This website is a public resource of general information that is intended, but not promised or guaranteed, to be correct, complete and up to date. The materials on this website, including all comments and responses to comments, do not constitute legal, tax, or other professional advice, and is not intended to create, and receipt or viewing does not constitute, nor should it be considered an invitation for, an attorney-client relationship. The reader should not rely on information provided herein and should always seek the advice of competent legal counsel and/or a tax professional in the reader’s state or jurisdiction. The owner of this website does not intend links on the website to be referrals or endorsements of the linked entities.