The Money Saving Secret of Donor Advised Funds Explained

Have you ever wondered what a donor-advised fund is and how you could use it to maximize your charitable giving and tax benefits? There are a few different ways to give to charity. Donor-advised funds (DAFs) or charitable gift funds are one of the most flexible and efficient tools for philanthropy and financial planning. In this post, we’ll break down exactly how DAFs work, how they compare to private foundations, what assets are best to contribute, and the smart strategies you can use to make the most of your giving. 

How to Set Up a Donor Advised Fund

Opening a donor-advised fund is surprisingly easy. Most of the big custodians have the ability to open a donor-advised fund on their platform. Schwab Charitable and Fidelity Charitable are two of the biggest ones. You can visit their websites and open up a donor-advised fund by filling out some paperwork. 

Another option is to ask your advisor to open an account for you. At Paces Ferry Wealth, we help people open DAFs every year to meet their annual philanthropic giving goals. 

How is a DAF Different Than a Private Foundation?

Donor-advised funds and private foundations are different in terms of cost, complexity, and flexibility. Here’s a quick breakdown of the differences. 

Donor-Advised Fund (DAF):

• Minimum to start: No minimum required
• Administrative costs: Low (typically around 0.6% per year)
• Tax return required: None
• Annual giving requirement: None—you can give when you’re ready
• Privacy: You can donate anonymously if you choose
  

Private Family Foundation:

• Minimum to start: Typically recommended to start with at least $1 million
• Administrative costs: High legal and administrative expenses
• Tax return required: Yes, with detailed reporting
• Annual giving requirement: Must donate 5% of total assets each year
• Privacy: Donations are public; your foundation is searchable

On the one hand, you have the donor-advised fund, which has no minimum to set up and no required giving every year. On the other hand, a private family foundation has high administrative costs, requires annual giving, and costs more to set up. 

SEE ALSO: Charitable Gifting 3 Ways: Strategic Charitable Giving Strategies

What to do After Setting Up a DAF?

You’re probably wondering how these accounts actually work. To start, you have to put money in the charitable gift fund, and you get a deduction in the year that you make that gift. You also don’t have to give the money right away. You can give the funds away in the future, but you get the deduction in the year you make the gift. 

If you contribute cash, you can deduct up to 60% of your adjusted gross income (AGI) for that year. For example, if your AGI is $350,000, you could deduct up to $210,000 in charitable contributions.

If you contribute appreciated securities, like stock that has increased in value, the deduction limit is 30% of your AGI. Contributing appreciated securities has an extra benefit because donating appreciated shares gives you a larger tax break. Let’s say you bought a stock for $1,000 and it’s now worth $2,000. As long as you’ve held it for more than a year, you can transfer it into your DAF and get a deduction for the full $2,000, not just the $1,000 you paid. You also don’t have to sell the stock or realize the gain, which means you avoid paying capital gains tax.

How Do I Maximize the Tax Benefits?

Since the 2017 Tax Cuts and Jobs Act, the standard deduction has been higher than ever. If your itemized deductions don’t exceed the standard deduction, your CPA will typically just apply the standard deduction. That means your charitable giving may not count toward lowering your taxes at all.

In 2025, the standard deduction is $15,750 for single filers and $31,500 for married couples. Unless all of your itemized deductions go beyond that amount, you’re not getting a direct tax break. However, there’s something you can do to utilize a DAF and maximise your charitable giving. You can frontload your charitable giving.  

Front-Load Charitable Giving to Surpass Standard Deduction Threshold

Frontloading means donating several years’ worth of your giving all at once, instead of spreading it out year by year. You get the tax deduction in the year you make the donation, but you don’t have to give the money away immediately. Let’s say you usually give $10,000 each year to charity. If you put $50,000 into a donor-advised fund now, that’s like prepaying five years of donations. You don’t have to give it to the charities right away, but you get the full $50,000 tax deduction this year. If your income isn’t high enough to take the full deduction in one year, you can carry the unused portion forward for up to five years.

It’s helpful if you:

• Have a high income this year and want a bigger tax break
• Don’t usually donate enough each year to itemize your taxes
• Want to support charities over time but make one big donation now

The money sits in your donor-advised fund, and you can send it to the charities later, in smaller chunks. But you’ve already gotten the tax benefit.

Using DAFs to Streamline Tax Reports

Donor-advised funds make recordkeeping much easier. Normally, every time you make a donation, you get a separate letter or receipt. You have to record and total the donations to send to your CPA for the year. 

If you make a gift into a donor-advised fund, you get one document for all contributions for the year. This works because you get the tax deduction when you make the gift into the fund, not when you give to charities later. So when you send money to charities in the following years, it’s not a reportable event.

How to Keep Donations Anonymous

Another benefit of using a donor-advised fund is the option to give anonymously. With a private family foundation, that’s not really possible because those are public. People can actually look them up and even try to solicit donations.

No one can look up the money in a donor-advised fund. When you give a gift, you also have the choice to do it anonymously. You can name your fund anything you want, and that name will stay on the account as long as there’s money in it. However, regardless of the name, you still have the option to give anonymously if you prefer.

Eligible recipients of DAF Contributions

You can use your donor-advised fund to give to any qualified 501(c)(3) charity. That’s the IRS classification for nonprofit organizations that are recognized as tax-exempt and eligible to receive charitable donations.

Larger charities are usually already in the system, so you can donate to them right away. If the organization is small, the custodian of your DAF, like Schwab Charitable or Fidelity Charitable, may need to verify their 501(c)(3) status with some paperwork. But you don’t have to handle that yourself. You can also work with your advisor. Do you want to make a donation to your alma mater for a scholarship fund? Your advisor will add those instructions to the letter accompanying the check from your DAF. 

Use DAFs to Instill Charitable Legacy

Are you interested in giving to the next generation? Donor-advised funds can help you do that by letting your legacy continue on. You can build it during your lifetime or leave it as part of your estate. DAFs are also a great way to instill charitable values in your kids or other family members. 

Many people with gift-giving funds ask family members to donate a certain amount each year. Often, it’s around the holidays or on a significant date. Your family can still make those charitable gifts on behalf of your donor-advised fund. 

Another benefit of using this kind of fund for legacy planning is that it lets you keep some control over large gifts, even after you’re gone. For example, let’s say you want to leave $1 million to a charity. What if, five years later, that organization isn’t using the money the way you intended? What if they become insolvent or their values change? With a donor-advised fund, your trustee can step in. They’ll know what your wishes were, and if something no longer aligns, they can pivot. 

How to Use DAFs for Retirement Strategies

The last thing we’re going to cover is a strategy you can use to bring everything we talked about today together. This is a strategy for front-loading charitable giving near retirement. Maybe you usually give $10,000 a year to charity, and you’re planning to retire at age 65. That means you’ll have 8 years until your required minimum distributions (RMDs) start at age 73.

RMDs are required withdrawals from your IRA, based on the balance as of December 31st of the previous year. In 2025, you can give up to $108,000 out of your IRA after age 70 1⁄2, and once your RMDs begin, you can give that money directly to charity. If your RMD is $108,000, you can give the whole thing to charity, which satisfies your RMD and fulfills your charitable giving at the same time.

So in the last few years before retirement, you could put $80,000 into your donor-advised fund. When you retire at 65, you start taking $10,000 a year out of your DAF and giving it to charities until you reach 73. At that point, you can switch to giving directly from your RMDs. In those final working years, you’re giving $10,000 a year and also adding about a third of the $80,000 to your DAF annually. That way, you get big deductions while your income is high, and once you retire, you continue your giving without worrying about getting a tax benefit because your income might be lower.

SEE ALSO: Create Your Estate Plan in 2025 with These 3 Essential Documents

Ready to Open a Donor-Advices Fund? We Can Help

At Paces Ferry Wealth Advisors, we can help you set up a DAF. Schedule a free consultation. Contact Paces Ferry Wealth Advisors today to speak with a wealth advisor in Atlanta, Georgia.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.