How Do Donor Advised Funds Work? A Plain-English Guide
If you’ve ever searched “how do donor advised funds work” and landed on an article written for a hedge fund manager, you’re not alone. Most of the content out there treats this like a billionaire’s tool. It isn’t. Here’s a straight answer.
A donor advised fund (DAF) is a charitable giving account. You contribute money or assets to it, receive a tax deduction immediately, and then recommend grants to the charities of your choice over time. The assets inside the fund grow tax-free, and both your original contribution and any appreciation can be directed to charity. Once money goes in, it’s irrevocable. It exists only to be given away, on your timeline.
That’s the core of it. Now here’s why it matters.
At Freedom Capital Advisors, a Florida-registered investment adviser, we work with business owners, retirees, and professionals who give to charity regularly but rarely get the full tax benefit for it. A donor advised fund changes that equation.
The Tax Problem Most Donors Don’t Realize They Have
The standard deduction in 2025 is $15,000 for single filers and $30,000 for married couples filing jointly. If your charitable giving doesn’t push your total deductions above those thresholds, you’re giving money away and getting zero tax benefit for it.
Say you donate $8,000 a year to your church and a few local causes. You take the standard deduction. Your giving is generous, but from a tax standpoint, it’s invisible.
A DAF fixes this through a strategy called bunching. Instead of giving $8,000 per year for five years, you contribute $40,000 into a DAF in a single year. You itemize that year and capture the full deduction. Then you grant $8,000 per year out of the fund to the same causes you always supported. Your charitable behavior doesn’t change. Your tax outcome does.
The Appreciated Stock Angle
This is where a DAF earns its keep for investors and business owners.
If you hold stock that has appreciated significantly, selling it and donating cash to charity triggers a taxable event first. You pay capital gains on the appreciation, then give what’s left.
Contributing the shares directly to a DAF skips that step entirely. You get a deduction at the full fair market value of the shares. The DAF sells the stock tax-free. No capital gains, no haircut. The full value goes toward your charitable intent.
For a business owner approaching a liquidity event, this is one of the most powerful tax planning moves available. Contribute appreciated shares before the sale closes, shelter the gain, and fund years of charitable giving in a single strategic move.
Who Controls the Money?
You do, with one important nuance. “Donor advised” means exactly what it says. You recommend grants to qualified 501(c)(3) charities, and the sponsoring organization approves them. In practice, legitimate grant recommendations are almost never rejected. But the money is not legally yours anymore the moment it enters the fund. You cannot withdraw it for personal use. That irrevocability is what earns you the upfront tax deduction.
The upside: the assets grow tax-free inside the fund, and you control the timing. There’s no deadline to distribute. You can build the account for years and grant on your own schedule.
A Better Option for Some Retirees
If you’re over 70½ and taking required minimum distributions, there’s a tool worth knowing before you open a DAF: the Qualified Charitable Distribution (QCD).
A QCD lets you transfer up to $108,000 per year directly from your IRA to a qualified charity. That transfer counts toward your RMD, and it never shows up as income on your tax return. No deduction needed because you never paid tax on it in the first place.
For a retiree who gives consistently and has RMD exposure, the QCD is often cleaner than a DAF. We’d rather you use the right tool for your situation than open a DAF because it sounds sophisticated.
Where to Open One
Most major DAFs are held at national sponsoring organizations like Fidelity Charitable, Schwab Charitable, or National Philanthropic Trust. Advisor-friendly platforms like National Philanthropic Trust allow you to keep your existing investment advisor managing the assets inside the fund, which means you don’t lose your advisory relationship just because assets are now earmarked for charity.
Community foundations are another option, particularly for donors who want their giving to stay local. If you’re in Northeast Georgia and want to direct your charitable giving toward this region specifically, a community foundation DAF is worth exploring. We’re actively looking for local organizations in this area that want to bring this tool to their donor community. If that’s you, reach out.
Is a DAF Right for You?
A donor advised fund makes the most sense if you have a high-income year coming up, appreciated assets you’ve been meaning to donate, or years of charitable giving that has never produced a meaningful tax benefit. It’s not a fit for everyone, but for the right situation it’s one of the most underused tools in personal finance.
If you want to talk through whether a DAF fits your situation, we’re happy to have that conversation.
Frequently Asked Questions
How do donor advised funds work?
You make an irrevocable contribution to a DAF account held at a sponsoring 501(c)(3) organization, receive an immediate tax deduction, and then recommend grants to qualified charities over time. The assets grow tax-free inside the fund until distributed.
Can you withdraw money from a donor advised fund?
No. Contributions to a DAF are irrevocable. The money can only be granted to qualified charities. It cannot be returned to the donor for personal use.
What is the difference between a donor advised fund and a private foundation?
A DAF is simpler, cheaper, and has no minimum distribution requirement. A private foundation offers more control and can employ family members, but costs significantly more to administer and requires distributing at least 5% of assets annually. DAFs are the better fit for most donors below $5-10 million in charitable assets.
What assets can you contribute to a donor advised fund?
Cash, publicly traded securities, mutual funds, and in some cases real estate, private business interests, or cryptocurrency. Contributing appreciated non-cash assets is often the most tax-efficient approach.
Is a donor advised fund better than a Qualified Charitable Distribution?
For retirees over 70½ taking required minimum distributions, a QCD is often the simpler and more tax-efficient option. A DAF makes more sense for donors in high-income years, those with appreciated assets, or those who want to build a longer-term charitable fund.
This article is for educational purposes only and does not constitute tax, legal, or investment advice. Consult a qualified tax professional regarding your specific situation.
Logan McCoy
Logan McCoy is an Investment Adviser Representative from Northeast Georgia, where he joined his father Ron to help bring Freedom Capital Advisors into its next chapter. Freedom Capital Advisors is an independent, fiduciary wealth management firm serving clients across the Southeast and nationwide. Logan focuses on retirement income planning, tax strategy, and helping business owners and retirees build portfolios that work in any market environment. He is also a financial literacy advocate for the next generation.
