There are plenty of sayings about how the act of giving may in fact be the greatest gift of all. Charitable donations allow you to put this philosophy to work, as it can be highly rewarding to make a positive financial impact on the causes you care about. Contributing to a donor-advised fund (DAF) is an increasingly popular way to manage charitable giving while maximizing the tax benefits of your donations.

Beyond their tax advantages, donor-advised funds allow you to maintain a great deal of control over how your charitable gift is distributed. Because they make it easy to manage donations, DAFs can make a suitable gift for loved ones with their own philanthropic aspirations. You can pay into a DAF and then make your gift recipient an advisor on the fund, allowing them to decide how charitable grants are administered.

Giving a donor-advised fund as a gift could be an effective way to introduce someone in your life to the importance and value of charitable giving. In contrast to giving financial assets directly to that person as a present, donor-advised funds offer a unique opportunity to give the gift of giving.

What Is a Donor-Advised Fund?

A donor-advised fund (DAF) is a registered 501(c)(3) organization that manages charitable donations on behalf of individuals, families, and other organizations. When you contribute cash or other financial assets to a DAF, your donation is immediately tax-deductible, and your investments can continue to grow tax-free within the DAF until you advise on how you’d like your charitable gift to be distributed. However, while you remain an advisor over how the funds are used, the final decision is up to the DAF sponsor—usually a community foundation, single-issue non-profit, or national non-profit— as you officially relinquish control over the asset when you make your irrevocable, or unalterable, donation.

One of the key advantages of contributing to a DAF is that you can take the tax deduction in the current year, even if the funds may not be distributed until later. If you donate to a DAF as a gift on behalf of somebody else, you can enjoy the tax benefit right away, and the recipient has plenty of time to develop a philanthropic strategy and decide which causes and organizations will ultimately receive the funds.

Tax Benefits of Donor-Advised Funds

The ability to deduct a donation now and advise on its charitable uses later makes it particularly useful to contribute to a DAF in years when you’ve received a windfall or have a lot of taxable income to offset. In fact, you can deduct up to 60% of adjusted gross income (AGI) on your federal taxes for cash contributions and up to 30% of AGI for appreciated securities that you donate to a DAF.

Although cash donations are capable of offsetting a greater percentage of your taxable income, there are additional benefits to donating securities that have appreciated in value to a DAF. For example, let’s say you own a stock that you bought a while ago at a low cost basis that has since skyrocketed. If you donate those shares to a DAF, you avoid paying the capital gains taxes you would have been subject to if you sold the stock, and you can take a deduction based on the current fair market value of the donation.

Giving Donor-Advised Funds as a Gift

While it may not be the first gift that comes to mind, contributing to a donor-advised fund on somebody’s behalf could add a sense of meaning to their life by giving them financial resources to carry out their own charitable work.

Or, if you determine that a DAF makes sense for your own charitable goals and your tax situation, you may decide to give somebody the gift of directing the eventual distribution of your donations. This would involve naming the person as “donor advisor” on your DAF account. DAF sponsors may allow multiple advisors on an account, so you may be able to split the advisory responsibilities with your gift recipient or give the gift to multiple people.

Once your gift recipient is registered as donor advisor, they can work with the DAF sponsor to distribute donations to the charitable organizations that are most important to them. While contributing to a DAF as a gift could be a great chance to teach a young person about philanthropy, the gift recipient will need to be at least 18 years old to serve as donor advisor.

Pitfalls of Gifting Donor-Advised Funds

While encouraging somebody to engage with charitable causes through a DAF could make a great gift, there are some downsides to keep in mind. First, whether you’re serving as donor advisor of the account yourself or you’ve given that responsibility to somebody else as a gift, once you’ve donated an asset to a DAF, it’s ultimately under the control of the sponsor.

In other words, if you give somebody the unique gift of naming them donor advisor of a DAF, they will have input into distributing the funds to charity, but the sponsor maintains the final say. Gift recipients will be able to pursue their charitable interests, but their recommendations will be subject to the due diligence of the DAF sponsor as well as requirements about the types of organizations that can receive DAF donations.

Another potential drawback with DAFs is that they allow the donated assets to sit in the fund indefinitely. In the case of giving a DAF as a gift, this means that the donations could remain in the fund for an extended period if the person you’ve named is not proactive in guiding the distribution of charitable gifts. That said, depending on how your contributions to the DAF are invested, any such delays could mean more time for appreciation and more money for charitable giving down the road.

In addition to the chance that your donations could sit idly, there are a few more risks you should be aware of before you contribute to a DAF on somebody’s behalf. For instance, the bankruptcy of the National Heritage Foundation in 2009 reportedly wiped out 9,000 DAFs worth $25 million before the donors had a chance to direct the funds to their desired charities.

There also have been cases of DAF sponsors using money contributed by donors for things like golf tournaments and their own legal fees. The policies and practices of the DAF sponsor you choose will affect your gift recipient’s ability to meet their charitable objectives, so it’s important to do your research before you donate your assets.

Even if you work with a reputable DAF sponsor and you’re confident in your gift recipient’s ability to make a positive impact, fees are another thing to keep an eye on. DAF sponsors tend to charge relatively high fees for managing the charitable accounts, which can chip away at the amount that donor advisors have available to direct to their favorite causes. There may be hidden fees involved with DAFs, so it’s important to research them carefully. While it may be unavoidable, the DAF sponsor profits from your charitable gifts by collecting these fees, which may not sit well with all donors.

The Bottom Line

A DAF is a tax-effective way to manage charitable giving. If you want to take advantage of these tax benefits while giving somebody else in your life the opportunity to pursue their own philanthropic interests, a DAF could make an excellent gift. Although you officially give up control over the assets you donate, once you name your gift recipient as the donor advisor of the DAF, they will be able to guide the distribution of charitable donations to organizations that are important to them.