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Explain how a charitable giving account, also called a donor-advised fund, can help you reduce your tax bill while supporting public nonprofit organizations.

Describe the benefits of giving to charities through a DAF, including a longer planning horizon and anonymous giving.

Point out key DAF restrictions, including the irrevocable nature of your gifts, and considerations before donating certain assets.

Reducing your tax bill isn’t the main reason you give to charity, but it is a factor. But sometimes you don’t know if you’ll get a tax break from giving until tax-filing time. And in some cases, you may want the tax treatment to take effect immediately, but want to spread out giving over time or even take time to consider where to direct your donation.

A donor-advised fund (DAF) can help by letting you set aside your gift and claim the tax deduction now, then take your time deciding which nonprofits to support. It can also facilitate anonymous giving (and prevent an endless stream of future donation requests). Here’s what you need to know about using a DAF for tax-efficient giving.

How donor-advised funds work

A donor-advised fund is a technical name for what is essentially a charitable giving account. The account is actually held by a public charity, which is what allows your account contributions to be immediately tax deductible. The charity’s purpose is to support grantmaking to other nonprofits, to boost grants by accepting and liquidating assets charities may not be equipped to, and to grow charitable funds through investing.

Opening a DAF is like opening a bank account. You’ll fill out appropriate forms with information about yourself (the donor), how you’re funding the account, and who should manage the account if you can’t (successors). Once your account is funded, you can recommend charities for the DAF to make grants using the assets in your account.

An individual, business, estate, irrevocable trust, or family limited partnership can open a giving account to contribute to a donor-advised fund. One giving account could have several account holders or grant advisors. If Mom and Dad want to create a tradition of strategic giving as a family, they can add their children to the DAF, enjoy institutional support, and take advantage of the opportunity as a family activity to invest and grow their contributions for future gifts.

Tax benefits of donor-advised fund contributions

DAF contributions have several potential tax advantages.

● Current-year deductions: If you itemize, you can generally deduct contributions in the year you make them (subject to AGI limitations).

● Capital gains tax avoidance: If you donate appreciated assets, you can increase the amount of your gift by avoiding capital gains tax. The charity managing the donor-advised fund will liquidate your asset, and its tax-exempt status means it won’t owe tax on the difference between what you paid for the asset and what the charity sold it for. The net proceeds will go into your giving account.

● Tax-free investment growth: If you need to research gift recipients, or if you’re waiting to accumulate a gift of a certain size, you can invest within your giving account without any tax drag, similar to investing within a retirement account.

● Estate tax avoidance: If you might owe estate or inheritance taxes when you die, contributing to a DAF or making it the beneficiary of your excess estate can allow you, not the government, to choose where your assets end up.

Your financial professional and tax advisor can help you create a personalized giving strategy if tax reduction is one of your giving goals. The nonprofit itself will typically not provide such guidance.

A convenient alternative to establishing a foundation

One reason DAFs were created was to allow high-net-worth individuals who are charitably inclined to donate assets without the administrative burdens of creating and operating a private foundation. If you don’t want to establish a board of directors, hold meetings, file additional tax returns, and meet other requirements, a DAF can be ideal.

That said, DAFs are not just for the affluent. Minimums to open an account, contribute, and make grant recommendations vary by provider but can be quite accessible. And you get to name your account — eponymously, perhaps, or after a particular loved one or cause — and that name can accompany your future gifts, if you want.

Less impactful giving?

However, establishing a DAF doesn’t allow you to create a community-based organization that other people can get involved with, like the private operating foundations and public charities some athletes and celebrities create. Nor does it allow you to solicit donations. A DAF is more like a private nonoperating family foundation in that it only makes grants.

A major criticism of DAFs is that they have no requirement to actually distribute any funds to charity. Foundations must distribute at least 5 percent of their assets annually (and sometimes those distributions go to the DAFs). DAFs had a median paid-out rate of 9 to 10 percent annually from 2020 through 2023, according to an April 2025 report by the Charity Reform Initiative of the Institute for Policy Studies (IPS).

Critics say that if taxpayers are subsidizing donations meant for the public good, then DAF contributions need to actually end up with charities, not remain in an account — especially since, according to IPS, 35 percent of individual gifts went to DAFs, and six of the country’s 10 largest-grossing charities were DAFs in 2023.

“If you’re not actively supporting a specific charity, giving through a donor-advised fund can sometimes make it easy to lose track of your intentions,” said Jacqueline Wiggins, an estate and business planning attorney at MassMutual. “Setting a yearly — or more frequent — reminder to make your charitable recommendations can help you keep your giving on track.”

“If you already hold an annual family meeting, that can be a great time to discuss and make recommendations together,” Wiggins added. “Another way to hold yourself accountable is to talk to the planned giving office of a charity you want to support. Let them know what you’re trying to accomplish with your DAF contributions.”

Why donate through a DAF?

In addition to gaining time to choose recipients, increasing your impact with tax savings, and creating a structured giving program for your family, donating through a DAF allows you to easily maintain your privacy.

You’ll be able to choose whether grant recipients receive your name, address, and giving account name, which can reduce unwanted solicitations for future donations. You may also value the opportunity for anonymity if you don’t want attention for a large gift, if your religious or moral code emphasizes the virtue of giving without receiving recognition in return, or if you don’t want to be judged or criticized for the causes you support.

“A DAF is also a good idea for someone who does not make large annual contributions but wants to build up their account over time to make larger strategic charitable contributions in future years, or who prefers to bunch donations in a single year to maximize their tax deduction,” Wiggins said.

Avoiding capital gains taxes while giving

Cash isn’t the only way to contribute to a DAF. Gifting appreciated assets that you’ve held for more than a year can be a more effective way to donate than selling, paying tax on the appreciation, then making a gift with the net proceeds.

Imagine you purchased 100 shares of a company stock in a taxable brokerage account in 2007 for $5 a share. At the end of 2024, each share was worth $250. If you sold your shares, you’d have a cost basis of $500, sale proceeds of $25,000, and a long-term capital gain of $24,500. (Related: Understanding capital gains)

If you sold the stock, you'd be subject to a long-term capital gains tax of up to 20 percent, depending on your filing status, and possibly the net investment income tax as well, another 3.8 percent. So, you could be giving Uncle Sam as much as $5,831 ($24,500 x 23.8 percent), leaving $19,169 for a donation.

Instead of donating $19,169 to charity and giving $5,831 to the government, you could donate the entire $25,000 stockholding value to charity, giving them considerably more money to work with. Plus, you could distribute the $25,000 to more than one charity or turn it into a recurring monthly donation instead of a lump sum.

Donating other non-cash assets to a DAF

Stocks aren’t the only assets you can contribute, and you need not limit yourself to donating appreciated assets. Maybe you don’t have a lot of cash to give, but you did inherit a valuable painting that isn’t your taste at all, or some natural gas interests that you don’t know the first thing about. A DAF may have the resources to sell this asset, saving you the headache of doing it yourself while also helping a charity.

Most organizations will accept publicly traded assets, such as stocks and bonds, as well as certain restricted stock shares. Policies vary when it comes to less liquid assets such as artwork and mineral rights. Cryptocurrency, real estate, and private company stock may also be restricted or not accepted. Plus, you may need different tax strategies for different types of donations. If you want to donate a specific asset, make sure to open your giving account with a sponsoring organization that will accept it.

Understanding DAF drawbacks

You’re more likely to have a satisfying experience with your donor-advised fund if you go into the endeavor understanding its limitations.

● Your contributions are fully committed. "Once you transfer money or other assets to a DAF, you’ve irrevocably given up control other than suggesting where the money goes,” Wiggins said.

● It’s important to plan for what-ifs. “The account owner can and should name a successor,” Wiggins said. “Otherwise, the DAF document determines what happens to the account. You want your charitable legacy completed. You don’t want to leave it to the sponsoring organization’s default provision.”

● Fees might reduce your impact. If you only have a few hundred dollars a year to donate, even a modest annual administrative fee — say, $100 — could mean that direct giving would be more beneficial.

● Gift matching may be unavailable. If your employer offers a gift-matching program, it may specifically exclude donor-advised funds from matching donations. You may prefer to amplify your giving by giving directly to get the match.

● DAFs have grant guidelines. If there’s a particular cause you want to give to, make sure you’ll be able to do that through your DAF. Donations to 501(c)3 public charities are usually fine, but donations to political campaigns, lobbying groups, and individuals are typically prohibited. In addition, while your grant recommendations are usually honored, the sponsoring organization is ultimately responsible for how it distributes funds.

● Processing may not be immediate. While the sponsoring organization will usually aim to make your recommended grant right away, you may need to make a direct donation when you want to meet an urgent need.

A financial professional can help you create a charitable giving strategy

You can make a bigger difference with your donations when you create an intentional giving strategy. A donor-advised fund is just one of your options. Consider discussing your charitable goals with a MassMutual financial professional who can help you explore tax-efficient ways to donate and how giving fits in with your broader financial plan.

Discover more from MassMutual…

Using life insurance for charity

Lifetime gifting strategies

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Using donor-advised funds for tax-smart giving | MassMutual