Q&A・Donor Advised Funds (DAFs) considering the One Big Beautiful Bill Act (OBBBA)

Some experts are recommending large contributions to a donor-advised fund THIS YEAR – before 2026, when One Big Beautiful Bill Act (OBBBA) reduces the potential tax deductions for donations. Does this strategy make sense?

We believe the first litmus test for contributing to a Donor Advised Fund (DAF) is whether or not a client is charitably inclined in general and will continue to be so over the next several years.  This can be a great tool for somebody who wants to leave a charitable legacy and is in a particularly high-income earning year or has sold a sizable asset like a home or a business.  In addition, of course, the client needs to have substantial enough assets to live on after the gift as it is irrevocable – in other words, once it’s contributed to the DAF it’s out of their hands!  If it’s a one-time donation to offset a tax liability in a certain year, they can accomplish the same result by just making an outright donation to a charity.

I find DAFs particularly beneficial for individuals with highly appreciated stock.  Funding a DAF with these positions helps the client both avoid the capital gains tax and provides them with a current year tax deduction.

As a best practice, we try to work with a client’s CPA to determine a thoughtful amount to contribute during the year.  We think pulling the whole team together (Wealth Manager and CPA) provides the best outcome for the client (although outcomes will vary based on individual circumstances).

Deductions for federal estate, lifetime gift and generation-skipping transfer taxes have been extended indefinitely. Moreover, those exemptions will increase next year, although not very much—and continue to increase every year thereafter to keep pace with inflation. Might this encourage more gifting, either within or outside of donor-advised funds? Which types of clients are likely to benefit most from this provision?

It certainly might encourage more gifting – but mostly to close family.  We saw a surge in gifting prior to Trump’s election and the OBBBA as there was some concern that the limits would sunset.  Many clients were taking advantage of the higher limits thinking that they might be adjusted downward.  Now, there is clearly less of a rush to do that given the indefinite extension.  This is clearly benefitting a client demographic that has an ultra-high net worth and have the ability to pass along tens of millions of dollars to their heirs during their lifetime.

What else should clients (and their advisors) know about donor-advised funds–perhaps something that’s misunderstood or overlooked?

Despite the clarity of the name, most clients don’t realize, at first, that it is no longer their asset – but as the “donor” they can now “advise” on the ultimate distribution of their assets which belong to the DAF.  The DAF itself, is a charity, which allows the client to receive the charitable deduction.  It can also take a little longer for the gift to be processed – a request is made to the DAF and is then evaluated to make sure the funds are going to an actual charity.

Clients should also understand that there are two ways for any remaining DAF balance to be distributed at their death.  They can name an alternate owner who would take on the role of “advisor” making requests to the DAF or they can have all of the remaining assets distributed to a charity of their choice. They should be prepared to choose one option or the other when setting up the fund.

Finally, the client has the ability to name their fund.  In my experience, some clients prefer choosing a name that doesn’t identify who they are (don’t use the David Jones family fund, for example, but rather the Owl’s Nest Fund or something equally ambiguous).  If your name is attached to the fund, it is easy to track you down and you are likely to receive significant additional requests from other charities.

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