Giving to charity makes a meaningful impact on the causes you care about each and every time, but it’s especially impactful for you at the end of the year when you need to cash in on tax deductions to minimize a bill owed to the IRS in the spring. Some may want to consider whether a donor-advised fund is the right move for their charitable giving this year and well into the future.
But what are the key donor-advised fund restrictions to know before tying up your funds?
Let’s take a deep dive into what you can expect from donor-advised funds and how you can make grants that align with the restrictions put in place by Uncle Sam.
Why Choose a Donor-Advised Fund?
When you have limited opportunities to give financial resources to improve the world around you, choosing the right vehicle matters. A donor-advised fund is merely one avenue to achieve a philanthropic goal with some key benefits for donors.
Before you decide, what exactly is a donor-advised fund?
A donor-advised fund (DAF) is a specific type of giving vehicle where you contribute your cash or assets irrevocably. As the donor, you decide what charity the funds should go toward and are the grant advisor on the DAF. The selected qualified charity will own the assets in the meantime and cash them in when the donor recommends a grant.
Giving this way has some perks for donors. First, the contribution you make is eligible for immediate tax deductions at the end of the tax year. This means that more of your money will make it to the charity of your choice and stay out of the pocket of the IRS.
Second, DAFs are an excellent way to establish a financial legacy for generations to come. You can name more than one grant advisor, making this ideal for children and grandchildren who may want to have some say in how their inheritance is spent for charities that matter to them.
Third, you get to make a donation now and leverage the tax benefits during a year where you may need to offset substantial income gains. However, the DAF does not necessarily have to spend the money in the same calendar year. It can hold onto the assets, letting them appreciate until just the right moment.
Donor-Advised Fund Restrictions and Rules
While it may seem like a DAF is the right move for someone focused on philanthropy, rules govern the donation and spending process. Before you contribute toward charities near and dear to your heart, here are the donor-advised fund restrictions to know.
Contributions Are Irrevocable
Once you decide to make a gift to your DAF, there is no going back. Contributions to donor-advised funds are irrevocable which means that you cannot change your mind weeks, months, or years down the road. Once given, the assets belong to the qualified charity of your choice as you decide to allocate funds for a specific purpose.
Grants Must Go to an Approved Organization
What organizations are eligible to receive contributions from a donor-advised fund? Not every person doing good work in local communities can receive grants from a DAF. Instead, you must give to charitable organizations recognized by the IRS as either a private foundation or a public charity, though many initiatives fall under this umbrella. Ask your charity for a copy of their IRS letter granting them charitable status.
No Personal Benefit
Some people like the sound of an inherent tax benefit for charitable giving, but they want to know what is in it for them. Unfortunately, a DAF may not be the right fit if you want to reap the benefits of your wealth. Funds cannot be used for personal use including tickets to events or galas or to cover membership fees. Even charity auctions are excluded from grants.
No Fulfillment of Pledges
Donor-advised funds are not to be used for personal and legally binding pledges to organizations. The exception is making a pledge to a charity that is not legally binding but can be fulfilled through the avenue of making a multi-year grant from the DAF.
No Political Contributions or Lobbying
Much like the earlier restriction about approved organizations, there is one more category worth considering before giving to a DAF. Namely, you cannot grant money to a political candidate or campaign.
Charitable Deduction
Of course, there are some limits to the tax benefits of your generosity. In 2025, donors are limited to a tax deduction on cash donations up to 60 percent of their adjusted gross income. This is the simplest and most straightforward way to give but is not the only option.
If they intend to give appreciated assets, they are eligible for a tax deduction for the full fair-market value of up to 30 percent of their adjusted gross income. They may even be able to avoid capital gains tax on appreciated assets held longer than one year.
Set Up Charitable Giving with Magellan
Are you ready to tackle that charitable giving you have been meaning to get around to and start impacting the world? Magellan offers comprehensive estate, financial, legal, and tax advice to help you make the most of your gift. If you think a charitable remainder trust or a donor-advised fund is the right fit for you, we are here to help.
Reach out to us today to see how we can help you leave a legacy for generations to come!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.