What is a Donor-Advised Fund?
A donor-advised fund (DAF) is a private account administered by a third party, typically a public charity or the charitable arm of a financial institution. Think of it as a charitable savings account. You contribute assets, receive an immediate tax deduction, and “advise” the fund on how to distribute grants to 501(c)(3) organizations over time. Because the DAF is tax-exempt, assets can be invested and grow tax-free.
While donor-advised funds have been part of the American philanthropic landscape since the 1930s, they have recently experienced a massive surge in popularity. This resurgence was originally sparked by the Tax Cuts and Jobs Act of 2018, but new legislative shifts under the One Big Beautiful Bill Act (OBBBA) have made DAFs an even more critical tool for high-net-worth (HNW) individuals navigating a complex tax environment.
Navigating New OBBBA Limitations
Recent tax law changes under the OBBBA have introduced specific hurdles for HNW donors that make DAFs particularly attractive as a defensive tax strategy:
- The Charitable Giving “Floor”: For those who itemize, the law now imposes a floor on deductions tied to 0.5% of Adjusted Gross Income (AGI). For example, if your AGI is $500,000, the first $2,500 of your giving is effectively non-deductible.
- The Deduction “Ceiling”: The OBBBA limits the benefit of itemized deductions to the 35% bracket. Even if a donor is in the 37% top bracket, their tax savings on a $100,000 gift (after the AGI floor) would be limited to 35% of the deductible amount.
- SALT Deduction Expansion: Notably, the OBBBA quadrupled the cap on state-and-local-tax (SALT) deductions to $40,000, a move that may benefit those who itemize.
The Power of “Bunching” and Pre-Emptive Giving
To mitigate the new limitations, many savvy taxpayers are front-loading their charitable contributions. By “bunching” several years’ worth of planned giving into a single DAF contribution before year-end, donors can maximize their deduction in a single year to surpass the AGI floor and offset higher-income spikes.
For example, a donor in the 37% bracket with an AGI of $1 million faces a $5,000 floor. By contributing $100,000 to a DAF, they secure a $33,250 tax benefit ($95,000 x 35%) while bypassing the higher floor they might hit if they spread smaller donations over several years.
Key Benefits of Donor-Advised Funds vs. Private Foundations
While foundations were once the gold standard, DAFs offer distinct advantages:
- Ease and Cost: DAFs can be established in days with minimal fees and no annual Form 990-PF filings.
- Privacy: Grants can be made anonymously, shielding donors from unwanted solicitations.
- No Minimum Distribution: Unlike the 5% payout rule for foundations, DAFs currently allow for longer-term strategic growth.
Creative Applications for Modern Wealth Management
Beyond simple tax savings, DAFs solve complex financial puzzles:
Offsetting “Windfall” Years: A large DAF contribution acts as a “shock absorber” during a business sale, decreasing taxable income when it is highest.
Legacy and Family Involvement: Naming children as successor advisors involves them in prioritizing community needs, teaching the next generation about stewardship.
Sustaining Support: Donors can contribute once during a high-liquidity event and set up automated grant schedules to ensure consistent support for non-profits regardless of future cash flow.
Bridging the “Tech Gap”: Small charities often cannot accept complex gifts like stock. The donor gets the tax benefit of the security, while the DAF sponsor handles the liquidation.
Estate Tax Considerations: 2026 and Beyond
The OBBBA expanded some existing deductions and made several temporary provisions permanent. High-net-worth individuals should note that gift and estate-tax exemptions will rise from $13.99 million per individual in 2025 to $15 million ($30 million for married couples) for 2026. Starting in 2027, these will be adjusted annually for inflation. While the top federal rate remains at 40%, the expanded exemption provides a significant window for strategic wealth transfer.
A donor-advised fund is more than a tax tool. It is a way to align financial success with personal values. By utilizing a DAF, you can navigate the new OBBBA floors and ceilings while ensuring your philanthropic legacy remains intact.
Do you have questions about optimizing your philanthropic impact under the new OBBBA guidelines? Whether you are looking to navigate the new 0.5% AGI floor or want to leverage the expanded $40,000 SALT deduction, our team can help you design a giving strategy that aligns with your financial goals.
Contact Us today to explore how a Donor-Advised Fund can serve as a cornerstone of your wealth management plan.