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Donor-Advised Funds (DAFs): A Strategic Way to Give Charitably, Teach Values, and Build a Lasting Legacy
For many of the families and professionals we work with at Waterworth Wealth Advisors, busy executives, medical professionals, business owners, and retirees, charitable giving is deeply personal. It’s about supporting causes that matter, being intentional with wealth, and setting an example for the next generation, all while navigating complex tax and estate planning considerations.
A Donor-Advised Fund (DAF) can be an exceptionally effective tool in a comprehensive wealth management plan, aligning generosity with thoughtful financial planning. Used well, a DAF can simplify giving, enhance tax efficiency, and create a meaningful family legacy.
What Is a Donor-Advised Fund (DAF)?
A donor-advised fund is a charitable giving account established at a public charity, often sponsored by a financial institution or community foundation. You make an irrevocable contribution to the fund, receive an immediate charitable tax deduction, and then recommend grants to qualified charities over time.
For high-income households, this flexibility is key:
- You control when to fund the DAF
- You control when charities receive grants
- You retain advisory privileges over investment allocation and charitable recommendations
This structure separates the year of the tax deduction from the year charitable gifts are made, creating valuable planning opportunities.
Why Donor-Advised Funds Are Especially Powerful for High-Income Professionals
Many of our clients face uneven income and complex compensation structures. Donor-advised funds work particularly well for:
- Corporate executives with bonuses, stock compensation, or deferred compensation payouts
- Medical professionals with variable income or practice ownership
- Business owners experiencing liquidity events or planning succession
- Families nearing or in retirement who want structured, intentional giving
DAFs allow you to be generous and strategic.
Tax Benefits of Donor-Advised Funds and Strategic Planning Opportunities
Immediate Tax Deduction
You receive a charitable deduction in the year you contribute to the DAF, even if grants to charities are made over many future years.
Charitable Giving Deduction Rules: 2025 vs. 2026
For taxpayers who itemize deductions in 2025, charitable giving is generally deductible under the following rules:
- Cash contributions to public charities (including donor-advised funds) are generally deductible up to 60% of adjusted gross income (AGI).
- Contributions of appreciated securities held longer than one year are generally deductible up to 30% of AGI, based on the full fair market value of the assets, while avoiding capital gains tax on the appreciation.
These rules allow high-income taxpayers to receive a meaningful tax benefit for charitable giving when deductions are not otherwise limited.
What Changes Beginning in 2026 Under the OBBB Act
Under current law in 2025, charitable contributions made by taxpayers who itemize are generally fully deductible (subject to existing percentage-of-income limits mentioned above), and each deductible dollar reduces taxable income at the taxpayer’s full marginal tax rate.
Beginning in 2026, the OBBB legislation introduces two new limitations for higher-income taxpayers who itemize:
- A 35% cap on the tax benefit of itemized deductions, including charitable contributions. This means that even if you are in a higher tax bracket, the tax savings from each dollar of charitable giving will be limited to 35%, reducing the value of the deduction compared to 2025.
- A new 0.5% of AGI floor on charitable deductions, meaning charitable contributions must exceed 0.5% of your adjusted gross income before any portion becomes deductible. In 2025, there is no such floor.
For many high-income households, these changes may significantly reduce the after-tax benefit of charitable giving starting in 2026, even if the total amount given to charity remains the same.
Why 2025 May Be a More Advantageous Year for Charitable Giving
Because these new limitations do not take effect until 2026, 2025 may represent a valuable planning window. Front-loading charitable contributions into a donor-advised fund (DAF) in 2025 can allow you to:
- Claim deductions under the current, more favorable rules
- Potentially increase the after-tax impact of your charitable dollars
- Preserve flexibility to distribute charitable gifts over many future years
When Front-Loading Charitable Giving Makes Sense
DAFs can be especially effective in high-income years, such as:
- Years with large bonuses or commissions
- Roth conversion years
- Capital gains from selling a business, medical practice, or real estate
- Years when itemizing deductions is otherwise advantageous
Avoiding Capital Gains Tax
Contributing appreciated securities with long-term capital gains directly to a DAF allows you to avoid capital gains tax while still receiving a deduction for the full fair market value. By contrast, when contributing securities with short-term capital gains, the deduction is generally limited to the cost basis, not the appreciated value. This makes long-term holdings especially effective for concentrated stock positions or long-held investments used in charitable planning.
Investing Donor-Advised Funds to Increase Charitable Impact
Unlike giving directly to charities, assets inside a donor-advised fund can be invested according to your risk tolerance and gifting time horizon. While returns are not guaranteed, investment growth can potentially increase the total dollars available for future charitable grants.
For clients who do not need to distribute charitable dollars immediately, this allows philanthropy to compound alongside the rest of their wealth strategy.
Using Donor-Advised Funds as a Family Legacy and Estate Planning Tool
Donor-advised funds can play an important role in estate and legacy planning. You can:
- Involve family members in charitable decisions during your lifetime
- Create a long-term charitable vision aligned with your values
- Name your children as successor donor-advisors
For many families, a DAF becomes a shared framework for discussing purpose, responsibility, and impact, rather than a one-time bequest.
Teaching Children Generosity Through a Donor-Advised Fund
One of the most meaningful benefits of a donor-advised fund is the opportunity to intentionally involve children in giving decisions.
Younger Children
- Discuss why certain causes matter
- Let them help select charities
- Introduce the idea that wealth can help others
Teenagers and Young Adults
- Encourage them to research nonprofits and present their ideas
- Allow them to recommend grants
- Teach them how to evaluate mission, effectiveness, and stewardship
Adult Children
- Name them as additional donor advisors or successor donor advisors
- Give them ongoing responsibility for charitable decisions
- Allow them to continue the family’s philanthropic mission
This approach reinforces that wealth is not just something to accumulate but to steward.
How Donor-Advised Funds Fit Into Estate Planning
As part of a broader estate planning strategy, donor-advised funds can:
- Reduce the size of a taxable estate
- Simplify charitable bequests
- Serve as an alternative to private foundations for many families
- Ensure charitable intentions continue across generations
Compared to private foundations, DAFs typically offer:
- Lower administrative costs
- Less regulatory complexity
- Greater privacy
For many Waterworth Wealth Advisor clients, this balance of flexibility and simplicity is ideal.
Important Donor-Advised Fund Rules and Considerations
While donor-advised funds are powerful, there are important guidelines:
- Contributions are irrevocable
- Grants must go to qualified public charities
- DAFs cannot be used to fulfill personal pledges or provide personal benefit
Proper coordination with your CPA and financial advisor is essential.
How Waterworth Wealth Advisors Helps Manage Donor-Advised Funds
We work closely with our clients to integrate donor-advised funds into their broader financial picture. Our role includes:
- Evaluating whether a DAF fits your tax, investment, and estate planning goals
- Identifying the most tax-efficient assets to contribute
- Opening and managing donor-advised funds
- Coordinating charitable strategies with CPAs and estate attorneys
- Helping families thoughtfully involve the next generation
At Waterworth Wealth Advisors, we believe charitable giving should feel intentional, strategic, and deeply aligned with your values. A donor-advised fund can be a powerful way to turn generosity into a lasting legacy for your family and the causes you care about most.
If you’d like to explore whether a donor-advised fund is appropriate for your situation, we’d love to have a conversation with you about your philanthropic goals.
Next Steps: Explore a Donor-Advised Fund with Waterworth Wealth Advisors
If you’re already giving generously or thinking about how charitable giving fits into your broader financial and estate plan, a donor-advised fund may be worth a closer look. At Waterworth Wealth Advisors, we help clients evaluate whether a DAF aligns with your tax strategy, investment goals, and long-term legacy planning, and we manage the process from setup through ongoing oversight. If you’d like a thoughtful, no-pressure conversation about how to give more intentionally while maximizing impact and efficiency, we invite you to connect with us.
FAQ: Donor-Advised Funds
Q: What are the tax benefits of a donor-advised fund?
A: Contributions to a DAF are tax-deductible in the year they are made, even if grants to charities occur later. Donating appreciated securities can help you avoid capital gains tax while maximizing your deduction. Additionally, front-loading contributions in high-income years, like 2025, may provide greater tax efficiency before the new 2026 OBBB rules take effect.
Q: Are donor-advised funds good for estate planning?
A: Yes. DAFs can reduce your taxable estate, simplify charitable bequests, and provide a flexible vehicle for multi-generational giving. Unlike private foundations, they have lower administrative costs and fewer regulatory requirements, making them an efficient way to leave a lasting philanthropic legacy.
Q: Can children be involved in donor-advised funds?
A: Absolutely. Children can be included at various stages, from helping select charities at a young age to serving as co-donor advisors or successor donor advisors as adults. This involvement helps teach values of generosity and stewardship across generations.
Q: Donor-advised fund vs private foundation: what’s the difference?
A: DAFs are more straightforward and more cost-effective. They have lower administrative and compliance burdens, greater privacy, and flexible investment options. Private foundations require more ongoing management, annual tax filings, and minimum distribution rules, but offer more control over grantmaking and investment strategies. A DAF is often a better fit for families seeking flexibility with less complexity.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with Waterworth Wealth Advisors, LLC, or any other entity listed.
Waterworth Wealth Advisors, LLC, Kestra Investment Services, LLC, and Kestra Advisory Services LLC, do not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. https://www.kestrafinancial.com/disclosures
