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What’s the Point of a Donor-Advised Fund?

A reader writes in, asking:

“Can you help me understand the point of ‘donor advised’ funds? I keep reading about them, but I do not see how this is any better than just donating to a charity directly.”

First a bit of background information: a donor-advised fund is a nonprofit entity, often run by a financial institution (e.g., Vanguard/Fidelity/Schwab). When you contribute money to the fund, it counts as a charitable contribution for tax purposes (i.e., you get an itemized deduction). And money you contribute to the fund goes into an account over which you have (limited) control. The money is no longer your money — you can’t take it out and spend it on groceries. But you maintain control of how it is invested. And at any time you can choose to have distributions (“grants”) made from the account to one or more charities of your choosing. (Such grants have no tax impact for you, because you’re not actually a party to those transactions. They are transactions between the fund and the ultimate charities.)

There are three main reasons why you might benefit from using a donor-advised fund:

  • You get the tax deduction now, without yet needing to figure out how much you want to give to which charities.
  • They provide anonymity, if desired.
  • They make it easier to donate securities (e.g., shares of mutual funds or stocks).

Note that none of these is a tax benefit.

Some companies that run donor-advised funds promote them as if they offer tax benefits, when in reality it’s just the same tax benefits that come from charitable contributions in general. That is, you don’t save any taxes with a donor-advised fund that you wouldn’t have saved by simply donating directly to the ultimate charitable recipient(s) instead of donating to the donor-advised fund.

These benefits are administrative benefits. But administrative benefits can be valuable.

Tax Deduction Now, Ultimate Decision Later

Just to reiterate, once you’ve contributed money to a donor-advised fund, that money is no longer your money. You cannot take it back out to spend on groceries. You cannot distribute the money to your nephew, even if he really needs it. And the money does not go to your kids when you die.

So, in that sense, the decision must be made before contributing to the fund.

But there might be years when, based on your budget and tax planning, you decide that you want to donate $X. And it’s often the case that this decision is made close to year-end (i.e., after you have a good idea as to your other various amounts of income/deductions). And you might not, right at that moment, want to have to figure out exactly how many dollars go to which charities. So you can make a contribution to your donor-advised fund, and then take your time with determining the ultimate recipients of the dollars. (Though the ultimate recipients do have to be charitable organizations.)

Similarly, a common tax planning strategy is to “bunch” itemized deductions into one year. For instance, if a single person would normally give $5,000 to charities each year, instead they could donate $25,000 every 5 years. The advantage of doing so is that, if they donate $5,000 every year, they may not get any tax advantage from the donations, as they’ll end up using the standard deduction instead. But by deduction bunching, they can claim a large itemized deduction in one year and still use the standard deduction in the other years.

Deduction bunching can be implemented without a donor-advised fund (i.e. just make large donations every several years rather than smaller donations every year). So again, the donor-advised fund isn’t providing any tax savings. But with a donor-advised fund you can make the tax/budgeting decision now and make the which-charities-get-the-money decision later. So again, not a tax benefit, but a noteworthy administrative benefit.

Anonymity, if Desired

The overwhelming majority of donations made in the U.S. are not anonymous. And that’s not terribly surprising. Most people want to be thanked. Plus, the simplest ways of donating to a charity (i.e., writing a check or pulling out the credit card) result in donations that aren’t anonymous.

But if you want to remain anonymous for any reason (even if that reason is just to stay off the mailing lists), donor-advised funds can be helpful. That’s because, when you make a grant from the fund to a charity of your choosing, you can select whether the grant will be anonymous or not. If you choose to remain anonymous, the charity would see, for example, that the donation came from Fidelity Charitable, but they wouldn’t know who the actual original donor was. The donor-advised fund serves as a middleman, shielding your identity.

Simplification of Donating Securities

When you donate assets a) that are not held in retirement accounts such as an IRA, b) that have gone up in value, and c) that you have owned for longer than one year, you get to claim an itemized deduction for the current market value of the asset and you do not have to pay tax on the appreciation. As such, donating such appreciated assets can be a very tax-savvy way to give.

But many charities, especially smaller ones, simply aren’t set up to accept donations of anything other than cash.

Donor-advised funds, on the other hand, are ideally situated to accept donations of securities, given that they’re often run by financial institutions. In fact, if your donor-advised fund is through the same company where you have your taxable brokerage account, the web interface will generally have a very easy way to simply select shares for donation and have them transferred to the donor-advised fund. And then from there, the fund can make a cash grant to the charity of your choosing.

What About Tax-Free Growth?

Sometimes people promote donor-advised funds by mentioning that they allow the money to remain invested and grow, tax-free prior to being distributed to the ultimate charity. But again, this benefit is just an illusion. If you donate money directly to a charity, that charity can invest the money, and any gains that they earn will be tax-free (because they’re a tax-exempt organization).

Some people counter that most charities would not choose to invest the money (i.e., they would spend it shortly after receiving the donation). That may be true of course. But all that the donor-advised fund is achieving in this regard is depriving the charity of the choice to spend the money immediately. In most cases I would argue that the charity itself has better knowledge of its goals, plans, and financial circumstances than the donor would have and is therefore in a better position to make this decision.

For More Information, See My Related Book:


Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

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