How Does a Donor-Advised Fund Actually Work?

Peter Pabich | Oct 22, 2026

What is a donor-advised fund, in plain English?

A DAF is a charitable giving account. You open it at a sponsoring charity, such as a community foundation or one of the large national sponsors like Fidelity Charitable or Schwab Charitable. You put money in – you can contribute cash or appreciated investments - receive your tax deduction in the year you contribute, and then recommend grants to the charities you care about whenever you're ready. In the meantime, the money can be invested.

There is one distinction worth understanding up front: Once you contribute, the assets belong to the sponsoring charity, not to you. You advise on which charities receive grants, and the sponsor makes the final call. In practice, grants to qualified charities are routinely approved, but this is why it's called donor-advised rather than donor-controlled.

How does the money move through a DAF?

There are four steps:

Contribute: You fund the account with cash, publicly traded stock, or mutual fund shares. Depending on the sponsor, some also accept real estate, alternative investments, or closely held business interests.
Deduct: You receive your charitable tax deduction in the year of the contribution, even if the grants to charities happen years later.
Invest: The money in the account is invested, and any growth is used for charitable grants.
Grant: You recommend grants to IRS-qualified charities on your own timeline. There is no IRS-required minimum payout for a DAF, although individual sponsors may have their own policies.

The key idea is that the tax decision (when you contribute) and the giving decision (when and where the money goes) are separated. That flexibility is the whole point.

Why is donating appreciated stock such a popular way to fund a DAF?

Because it can be more efficient than giving cash. When you donate long-term appreciated securities, you generally deduct the full market value, and no capital gains tax is paid on the appreciation.

Here’s a hypothetical illustration: Say you own stock you bought years ago for $20,000 that is now worth $50,000, and you'd like to give $50,000 to charity.

If you sell first, then give cash: You'd owe capital gains tax on the $30,000 gain, roughly $4,500 at a 15% federal rate (and more at higher rates), leaving about $45,500 to give.
If you give the shares to a DAF: The full $50,000 goes to work for charity, and you generally deduct the full market value.

There are limits to know about. The IRS caps how much you can deduct in a given year: up to 60% of your adjusted gross income (AGI) for cash gifts and up to 30% of AGI for appreciated securities. Anything over the limit can generally be carried forward for up to five years.

It’s also important to note that your actual rates and situation will differ, and the shares generally need to have been held longer than a year.

How do the 2026 charitable deduction changes affect a DAF?

This is where timing and strategy deserve a fresh look. Four changes from recent legislature take effect with the 2026 tax year:

A new 0.5% AGI floor for itemizers: Itemizers can only deduct charitable gifts to the extent they exceed 0.5% of their AGI. For example, a couple with $300,000 of AGI can only deduct donations above $1,500.
A 35% cap on the value of the deduction for top-bracket taxpayers: For those in the 37% bracket, the tax benefit of itemized charitable deductions is capped at 35%, so a $1,000 donation is worth $350 instead of $370.
A new deduction for non-itemizers: Starting in 2026, people who take the standard deduction can deduct up to $1,000 (single) or $2,000 (married filing jointly) of cash donations. This applies to cash gifts made directly to qualified public charities, so a contribution to a DAF generally does not count.
The 60% of AGI limit on cash gifts is now permanent: It was previously set to expire.

What this means in practice: The floor is applied every year, which tends to favor fewer, larger gifts over many small ones. That's why some donors “bunch” their giving, meaning combining several years of giving into one year. A DAF is a natural vehicle for this: You make one large contribution, take the deduction that year, and then spread the grants to charities over time.

Here’s another illustration: A married couple with $400,000 of AGI gives $20,000 to charity every year and itemizes.

If they give directly each year: The 0.5% floor is $2,000 each year, so $18,000 is deductible annually, or $54,000 over three years.
If they bunch through a DAF: They contribute $60,000 in one year and recommend $20,000 in grants each year. The floor applies only once, so $58,000 is deductible.

The charities receive the same $20,000 a year either way, but the couple deducts about $4,000 more in total. In the other two years, they may be able to take the standard deduction, which is $32,200 for married couples in 2026. The 35% cap could also reduce the value of each deduction for top-bracket taxpayers, so the real-world benefit depends on the whole tax picture.

Who is a donor-advised fund a good fit for?

A DAF tends to work well for families who:

Give regularly and want to be more intentional about timing
Hold appreciated stock or other investments they'd like to put to charitable use
Have an unusually high-income year, such as a business sale, a large bonus, or a major stock sale, and want the deduction when it's most valuable
Want a single place to track gifts and receipts instead of a pile of acknowledgment letters
Would like to involve children or grandchildren in family giving

It may not be the right fit if you give small amounts occasionally (a direct gift is simpler), you want the ability to access the money again, or you'd like the new non-itemizer deduction to apply to your gifts, which requires giving cash directly to charities. And if you are 70½ or older and plan to use qualified charitable distributions from your IRA, note that those cannot go to a DAF.

What should I know about the rules and trade-offs before opening one?

Contributions are irrevocable: Once you give, you can't take the money back.
You advise, the sponsor decides: The sponsoring charity has the final say on grants.
Minimums and fees vary: There is no IRS-mandated limit on how much you can contribute or grant, but sponsors may set minimum contributions and minimum annual grants. Ask about administrative fees and investment costs, which differ from one sponsor to the next.
Grants have to be for charitable purposes: Grants to political groups are not allowed. You also can't use a DAF grant to pay for event tickets, galas, or auctions unless the cost is fully tax deductible, and grants can't fund scholarships where you or your family members might be eligible recipients.
Give yourself time: Stock transfers and year-end processing can take days, and December is busy for everyone. If you're considering a DAF for 2026, October and November are better than the last week of December.

How can a DAF help my family give together?

For many families, this is the most meaningful benefit. A DAF can give the next generation a low-pressure way into conversations about values, generosity, and money, without putting anyone on the spot about the size of the family's wealth.

Many sponsors let you name successor advisors, such as your children, who can continue recommending grants in the future. Some sponsors limit the number of successor generations, so it's worth asking. Even before a formal succession plan, there are simple ways to start:

Give each child a small portion of the annual grants to direct to a cause they care about
Hold a short family conversation once a year about which causes to support and why
Let teenagers and young adults research and present a charity to the family

These small habits tend to teach more about stewardship than any lecture could.

What mistakes do people make with donor-advised funds?

Funding the account without a giving plan: Because there's no required payout, money can sit for years. Decide on a rhythm for grants.
Ignoring fees and investment options: These affect how much ultimately reaches charity.
Giving cash when appreciated stock would go further: The best asset to give depends on your tax situation, and it's worth looking at before you write a check.
Expecting to fund a DAF from an IRA charitable distribution: QCDs must go directly to qualified public charities, not to a DAF.
Missing the interaction with your overall tax picture: AGI limits, carryforwards, and the new 2026 floor and cap all affect how much a gift is really worth to you.
Treating it as a standalone decision: A DAF works best when it fits with your investments, taxes, and estate plan.

How Entrust Wealth Partners can help

A donor-advised fund is rarely just a giving decision. It touches your tax bracket, your investment portfolio, and the legacy you want to leave. At Entrust Wealth Partners, our team looks at all of it together, so your giving fits your complete financial picture rather than being a one-off decision made in December. To learn more or to get started, contact us at (860) 838-3730.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This material was prepared by Growth Minded Strategy.