Tax Planning
Date: January 9, 2024

Understanding Donor Advised Funds: Pros and Cons

Charitable giving is a noble act that many people aspire to do. However, it is not always easy to choose a charitable organization to support or decide the best approach to donate. Donor Advised Funds (DAFs) have gained popularity as a charitable giving option, with its unique benefits and drawbacks. In this blog post, we will discuss the pros and cons of using DAFs as a charitable giving vehicle. We will also share insights from Watts Gwilliam & Co., a Gilbert Arizona-based investment advisor that is experienced in helping high net worth investors, business owners, and charitable-minded individuals make informed decisions about charitable giving.

Donor Advised Funds“High-net-worth investors can do so much to help their communities. Donor advised funds give these chartable minded individuals an excellent tool to help those around them while receiving tax benefits for their donations. It really is a win-win.” David Watts, Founding Member, Watts Gwilliam

Pros of Donor Advised Funds

DAFs offer several potential benefits to charitable-minded individuals:

Tax advantages: Individuals receive an upfront tax deduction for contributions to a DAF. Furthermore, they can avoid capital gains taxes by donating appreciated assets, such as stocks, to their DAF.

Flexibility: DAFs offer flexibility and control over charitable giving. Contributors can name their DAF and family members as successors. They can also recommend grants to their preferred nonprofit organizations. These charitable grants do not need to be made the same year as the contribution. This allows you to make the donations to your DAF during years you need the tax deduction while donating to the charity at times you find most appropriate.

Less administrative hassle: DAFs reduce the administrative burden on the donor. Funds are managed by a professional fund manager, and grant-making decisions are made through their online portals.

Investment Returns: Balances in your DAF can be invested in a variety of stocks, mutual funds, and alternative investments. Grow your DAF funds and turn it into a lifetime giving machine.

Cons of Donor Advised Funds

While DAFs offer several benefits, they also have some drawbacks:

Reduced giving: There is no requirement for DAF fund managers to distribute their assets immediately. This means that funds donated to DAFs might not be used for charitable purposes immediately. This could lead to reduced giving impact over time.

Limited nonprofit options: DAFs typically require donations to IRS-approved charities. This means that there is a limited pool of nonprofits, especially in niche or specific causes.

Lack of transparency: DAFs have come under scrutiny for their lack of transparency over the years. Critics have called for greater disclosure requirements to ensure that DAF managers distribute funds to charitable organizations promptly.

Donor Advised Funds offer an excellent approach to charitable giving, with unique advantages and drawbacks. Ultimately, whether DAFs are the right choice for donors depends on their personal preference and priorities. If you are considering using DAFs as a charitable giving vehicle, it’s essential to work with an experienced investment advisor like Watts Gwilliam & Co.. Watts Gwilliam & Co. is a registered investment advisor in Gilbert, Arizona. As a fee only fiduciary, they can guide you through the various charitable giving options and help you make informed decisions that align with your values, priorities, and impact goals.



David Watts

Dave is one of the firm’s founders. He helps business owners, professional athletes, and other high-net worth clients develop and implement financial plans and strategies. He also specializes in helping those with single-stock positions to diversify and manage their financial lives. Other areas of specialty are wealth transfer plans for concentrated stockholders and business owners; tax minimization strategies for those with employee stock options; cash flow management; and risk management planning.