Your charity-minded clients may inquire about the best way to give. They may have heard about donor-advised funds (DAFs), but as the Smiths' story shows, even spouses can differ on the best approach.

To set the stage:

Meet Paul and Mary Smith - they have raised their family in Anytown and built a successful small business over 30 years. Now in their early 60s, with three grown children, they're thinking about giving back to their community. After selling their business property, they face significant capital gains taxes and are exploring their options.

Paul, always focused on efficiency and financial optimization, is drawn to the Big Corp Charitable DAF program. "The 0.6% fee means more money for actual grants," he emphasizes, showing Mary their sleek online donation management platform. We could start giving right away to any charity in the country."

Mary, however, is deeply moved by their meeting with Sarah at the Greater Anytown Community Foundation. While their 1.5% annual fee is higher, Mary appreciates their intimate knowledge of local needs. "They know which nonprofits are doing the real work here," she tells Paul. "Plus, they can involve our children in understanding the community's challenges. That's worth the extra cost."

Their friendly disagreement reflects a larger debate in the DAF world between commercial efficiency and community engagement. They ultimately compromise: establishing the "Paul and Mary Smith Family Fund" with $400,000 at the community foundation for local giving, and a $100,000 fund at Fidelity Charitable for their national charitable interests. Both can log in to recommend grants, and they've named their children - Michael, Lisa, and Jennifer - as successor advisors.

When Paul suggests committing to specific annual distribution amounts to ensure the money gets to work quickly, Mary prefers keeping flexibility to respond to community needs as they arise. They don't realize their discussion mirrors a national debate about DAF distribution requirements and the balance between donor flexibility and charitable impact.

Legal and Tax Framework of Donor-Advised Funds

The legal structure of Donor Advised Funds (DAFs) is principally defined by Internal Revenue Code § 4966(d)(2), which establishes three fundamental requirements that characterize these charitable giving vehicles. At its core, a DAF must be separately identified by reference to its donors' contributions, owned and controlled by a qualifying sponsoring organization, and subject to the donor's advisory privileges regarding distributions and investments.

The sponsoring organizations themselves must meet specific criteria under the tax code. According to IRC § 4966(d)(1), the term “sponsoring organization” is defined a bit clumsily as any organization which is described in section 170(c) (other than in paragraph (1) thereof, and without regard to paragraph (2)(A) thereof), is not a private foundation (as defined in section 509(a)), and maintains 1 or more donor advised funds. In practice, these are so-called community foundations, and commercial sponsors of DAFs such as Fidelity Charitable and many others.

DAFs offer donors significant tax benefits under IRC § 170. Contributors receive an immediate tax deduction upon making their donation, though these deductions are subject to adjusted gross income (AGI) limitations. Cash contributions can be deducted up to 60% of AGI, while appreciated securities are limited to 30% of AGI. Importantly, donors can carry forward excess contributions for up to five years, providing flexibility in tax planning. The valuation of contributions follows established principles: publicly traded securities are valued at fair market value, while private securities and other property must undergo qualified appraisal procedures.

The law prohibits donors from receiving more than incidental benefits from fund distributions (§4967), and the sponsoring organization must exercise independent control over the funds while typically following donor grant recommendations that meet legal requirements.

Importantly, DAFs are not subject to excess business holdings restrictions applicable to private foundations under IRC § 4943. This, together with no minimum distribution requirements for DAFs, is a contentious subject (see below).

Federal oversight of Donor Advised Funds flows through their sponsoring organizations. The sponsoring organizations (not necessarily charities themselves) hold and manage these charitable giving accounts. The Pension Protection Act of 2006 established the framework: sponsoring organizations report aggregate DAF activity annually on Form 990 Schedule D, and the IRS enforces prohibitions on improper benefits to donors through excise taxes under sections 4966 and 4967. While donors maintain advisory privileges over grants, sponsoring organizations must exercise real control and ensure funds serve charitable purposes.

State oversight adds another layer of governance through charitable trust laws and registration requirements. DAFs generally fall under state charitable trust doctrine, subjecting them to Attorney General oversight and compliance with state-specific prudent investor rules. Registration and reporting requirements vary by jurisdiction, but generally align with other charitable organization requirements.

DAFs offer several distinguishing features under the IRC compared to private foundations. These include higher deduction limitations, the absence of a minimum distribution requirement, freedom from excise taxes on investment income, and simpler public disclosure requirements. Some consider these differences advantages, others disadvantages. The administrative burden is generally lighter, making DAFs an attractive alternative for many donors seeking to engage in structured charitable giving.

The legal and tax framework surrounding DAFs continues to evolve, with ongoing policy discussions particularly focused on distribution requirements and regulatory oversight. Understanding these requirements is crucial for donors, sponsoring organizations, and their advisors to ensure compliant and effective charitable giving through DAFs.

The Controversy Over Donor-Advised Fund Distributions

The debate over donor-advised fund (DAF) distribution policies has emerged as one of the most contentious issues in modern philanthropy, highlighting fundamental tensions between donor flexibility and public benefit. Unlike their private foundation counterparts, which must distribute at least 5% of assets annually, DAFs operate without statutory distribution requirements—a freedom that has sparked increasingly heated controversy as their popularity and assets have grown exponentially.

The controversy gained significant momentum when Fidelity Charitable surpassed the United Way in 2017 to become America's largest charitable grantmaker (1). This watershed moment crystallized critics' concerns: here was an organization primarily serving as an intermediary for charitable dollars, rather than directly providing charitable services, now standing as the nation's leading "charity" collecting enormous amounts of fees. The milestone sparked intense debate about the changing nature of American philanthropy and whether the current regulatory framework adequately serves the public interest.

Perhaps no case better illustrates the complexities and controversies surrounding DAF distributions than the Silicon Valley Community Foundation (SVCF). As tech wealth poured into the foundation, its assets swelled to over $13.5 billion, making it one of the largest community foundations in the world. However, critics noted a striking disconnect: despite managing billions in assets, actual distributions to local charities remained relatively modest, with many grants going to Stanford, not usually considered a community college. The SVCF case became a powerful symbol for those arguing that DAFs had become more effective at accumulating wealth than distributing it to active charities (2).

Boston College Law Professor Ray Madoff emerged as a leading academic voice in this debate, articulating what she termed the "timing mismatch" at the heart of the DAF controversy: donors receive immediate and substantial tax benefits while the charitable benefits to society may be indefinitely delayed. Her research and congressional testimony helped frame the issue as not merely one of philanthropic preference but of tax policy and public benefit (3). Her research has been criticized by others (4).

The debate intensified in 2020 when a coalition of philanthropists, foundation leaders, and academics launched the Initiative to Accelerate Charitable Giving (5). Their timing proved significant, coinciding with a period when DAF assets had doubled from $70 billion in 2014 to over $140 billion in 2019, yet distribution rates remained relatively static. The Covid-19 pandemic added urgency to their arguments, as billions sat in DAFs while charities faced unprecedented demands for services.

Legislative responses have emerged at both state and federal levels, though with limited success thus far. California's AB 1712 in 2020 attempted to mandate detailed reporting of DAF distribution rates but failed in the face of strong industry opposition (6). At the federal level, the Accelerating Charitable Efforts (ACE) Act, introduced by Senators King and Grassley in 2021, proposed substantial reforms, including a 15-year maximum time limit for DAF distributions and modifications to charitable deduction timing (7).

The DAF industry has mounted a vigorous defense of current practices. The National Philanthropic Trust regularly publishes data showing aggregate DAF distribution rates exceeding 20%, significantly higher than the 5% required of private foundations (8). However, critics argue these figures are inflated by DAF-to-DAF transfers and the higher initial distribution rates of newly created funds. Community foundations have been particularly vocal, arguing that DAFs serve as crucial "rainy day funds" for communities and that mandatory distribution requirements could harm smaller communities' long-term interests.

Reform advocates have coalesced around several key proposals: minimum annual distribution requirements mirroring private foundations, time limits on fund duration, enhanced transparency requirements, limitations on DAF-to-DAF transfers, and modified tax deduction timing. DAF sponsors counter that current average distribution rates already exceed private foundation requirements and that additional regulations would increase administrative costs while reducing philanthropic flexibility.

The controversy has produced some positive changes, including enhanced voluntary reporting by major DAF sponsors, the development of best practices guidelines, and increased focus on distribution rates in sponsor marketing. However, the fundamental tension remains unresolved: how to balance the flexibility that makes DAFs attractive to donors with ensuring timely public benefit from tax-advantaged charitable dollars.

Commercial vs. Community DAFs

The landscape of donor-advised funds (DAFs) is marked by a divide between commercial and community models, each reflecting distinctly different approaches to charitable giving. This division, which emerged as DAFs evolved from their community foundation origins to become a major commercial financial product, illuminates broader tensions in modern philanthropy between efficiency and community engagement, scale and personalization, cost and service.

Commercial DAFs, pioneered by Fidelity Charitable in 1991 and later joined by other financial services giants like Schwab and Vanguard, have transformed the DAF landscape through their scale and marketing reach. These institutions leveraged their existing financial infrastructure and client relationships to build massive DAF programs that now dominate the market. As mentioned, Fidelity Charitable's ascension to become the nation's largest charitable grant giver in 2017, surpassing the United Way, symbolized this transformation. 2023 was a banner year for Fidelity Charitable with 2.3 million grants totaling $11.8 billion—quadrupling its impact on the nonprofit sector in just 10 years (9).

The commercial model prioritizes efficiency and accessibility. These providers typically offer lower administrative fees, often starting around 0.60% for smaller accounts and declining to 0.20% for larger ones. Their technological infrastructure enables smooth online operations, easy grant recommendations, and seamless integration with existing investment accounts. However, this efficiency comes with a standardized approach—what critics call a "charitable checking account" model (10)—where personal engagement is minimal and local community knowledge is limited.

In contrast, community foundations, the original DAF sponsors, operate on a different philosophy. Their higher administrative fees - typically 1-2% annually - are said to be justified by a more comprehensive service model deeply rooted in local community engagement. These organizations employ staff with intimate knowledge of local nonprofits, social issues, and community needs. They often provide donors with detailed research about community challenges, arrange site visits to potential grant recipients, and facilitate connections among donors with similar interests.

While commercial DAFs appear less expensive at first glance, the total cost picture is more complex. Community foundations aim to reinvest their fee income into local philanthropic infrastructure - supporting needs assessments, nonprofit capacity building, and community leadership initiatives. However, even this assertion is not unchallenged, see the Community Foundation of Silicon Valley discussion above. Supporters of community foundations call this a "double charitable benefit" - the grants from the DAF itself and the community-building work funded by the fees. Your individual clients may see this differently and prefer a low-fee solution. This is an entirely rational approach as investment incomes are often severely curtailed by fees. Commercial sponsors direct fee income to their corporate bottom lines, leading critics to question whether they have turned charitable giving into a profit center. 

The models also differ in their approach to donor engagement. Commercial DAFs excel at transactional efficiency - making it easy to donate appreciated securities and recommend grants with a few clicks. Community foundations, however, position themselves as philanthropic advisors and community catalysts. They often host donor education events, organize collective giving initiatives, and facilitate collaborations among donors and nonprofits. This high-touch approach, while more expensive to maintain, they say, can lead to more strategic and locally informed giving.

Looking forward, both models face distinct challenges. Commercial DAFs must address concerns about their role in "warehousing" charitable dollars and questions about whether their fee structures appropriately serve charitable purposes. Community foundations, meanwhile, must demonstrate that their higher-cost, high-touch model delivers sufficient additional value to justify its expense in an increasingly competitive marketplace.

Alternatives to DAFs for your Clients

This article does not comprehensively treat DAF alternatives. The following table is intended as a refresher.

Table 1: Charitable Giving Alternatives

Conclusion

DAFs offer significant advantages for many donors - tax efficiency, administrative simplicity, and family involvement - but they aren't the only path to meaningful philanthropy. The choice between commercial and community foundation DAFs adds another layer to consider, balancing cost efficiency against local engagement and expertise.

As the Smith family's story illustrates, DAFs can effectively bridge personal tax planning with lasting charitable impact. However, advisors should approach each situation holistically, considering their clients' complete financial picture and full range of giving options. Whether through DAFs or other vehicles, the key is matching the giving strategy to the donor's specific objectives while remaining mindful of both tax efficiency, fee structure and use, and charitable impact.

A podcast that summarized the points of this article is available here:

References

1. William P. Barrett, The Largest U.S. Charities for 2017, Forbes (Dec. 13, 2017), https://www.forbes.com/sites/williampbarrett/2017/12/13/the-largest-u-s-charities-for-2017/. 
2. Open Impact, The Giving Code: Silicon Valley Nonprofits and Philanthropy (Oct. 25, 2016), https://openimpact.io/wp-content/uploads/2022/05/GivingCode_full_download_102516.pdf.
3. A Charitable Sleight of Hand, Boston College Law Magazine (Jan. 2017), https://lawmagazine.bc.edu/2017/01/a-charitable-sleight-of-hand/.
4. Flawed Study Makes Erroneous Claims About DAFs, Philanthropy Roundtable (Feb. 2022), https://www.philanthropyroundtable.org/wp-content/uploads/2022/02/Flawed-Study-Makes-Erroneous-Claims-About-DAFs.pdf.
5. Accelerate Charitable Giving (2024), https://acceleratecharitablegiving.org/.
6. A.B. 1712, 2019–2020 Assemb., Reg. Sess. (Cal. 2020), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB1712.
7. S. 1981, 117th Cong. (2021), https://www.congress.gov/bill/117th-congress/senate-bill/1981.
8. National Philanthropic Trust, 2023 Annual Report, https://www.nptrust.org/annual-reports/the-2023-annual-report/.
9. Fidelity Charitable, 2024 Giving Report (2024), https://www.fidelitycharitable.org/content/dam/fc-public/docs/insights/2024-giving-report.pdf. 
10. Paul Sullivan, Tech Money Flows Into Charitable Funds. It’s Complicated., The New York Times (Aug. 3, 2018), https://www.nytimes.com/2018/08/03/business/donor-advised-funds-tech-tax.html.