Donor-Advised Funds: A Strategic Tool for UHNW Philanthropy

For many ultra-high-net-worth (UHNW) individuals and families, philanthropy is not simply a generous act, it’s an essential part of legacy building. Increasingly, Donor-Advised Funds (DAFs) are becoming a preferred vehicle for those who want to maximize their charitable impact in a way that is both strategic and straightforward.

At their core, DAFs allow donors to make irrevocable contributions, claim an immediate tax deduction, and then recommend grants to qualified charities over time. But their true value lies in the combination of tax efficiency, investment potential, family engagement, and legacy planning they can support.

A tax-efficient approach to giving

One of the most attractive features of a DAF is the ability to secure an income tax deduction in the year you contribute, even if the actual grants to charities happen years later. This timing flexibility can be particularly valuable when income fluctuates year to year or when liquidity events, such as the sale of a business, create unusually high taxable income.

For those donating appreciated assets, the benefits are potentially even greater. By contributing stocks, real estate or private business interests directly to a DAF, donors may avoid capital gains tax that would otherwise apply if they sold the assets themselves. Instead, they receive a deduction based on the full fair market value. Compared to private foundations, DAFs typically allow higher deduction limits relative to adjusted gross income, enabling more powerful tax planning.

Unlocking investment growth within a DAF

Another distinguishing feature of DAFs is the opportunity for donated assets to be invested for potential growth. Assets inside a DAF are able to grow tax-free, allowing charitable capital to compound over time. In some cases, careful investment management can significantly increase the amount ultimately available for philanthropic grants.

DAFs typically accept a wide range of assets, such as cash, public securities, and other investments, offering donors many diversification options as they build their charitable plans.

A flexible platform for strategic giving

Beyond the immediate tax advantages, DAFs offer flexibility that few other charitable vehicles can match. Once a contribution is made, donors retain the ability to recommend grants to causes and organizations as their priorities evolve. This separation between the timing of a gift and the disbursement of funds can be particularly useful during periods of economic uncertainty or when philanthropic interests change.

Many UHNW families also find that DAFs provide an ideal platform to engage younger generations. Recommending grants together can be a way to cultivate a sense of shared purpose and instill charitable habits that endure across generations.

In the context of estate planning, DAFs offer further advantages. Assets contributed to a DAF are removed from the taxable estate, helping to manage potential estate tax liabilities. Most DAF sponsors also allow donors to name successors or charitable beneficiaries, enabling a philanthropic legacy that can span decades or more.

And, unlike private foundations, DAFs offer the option of donor anonymity, preserving privacy in a world where high-profile philanthropy may attract unwanted attention.

Private foundations: An alternative with more complexity

For some donors, a private foundation may still be the right choice, particularly if there is a desire for direct control over grantmaking, staffing or operational initiatives. Foundations can also support certain activities that DAFs typically cannot, such as awarding scholarships or directly running programs.

However, this control comes with a cost. Foundations require ongoing administration, annual tax filings, management of minimum distribution requirements and close attention to regulatory compliance. They may also offer lower charitable deduction limits relative to DAFs and lack the ability to shield donors’ identities.

For families seeking maximum efficiency, flexibility and simplicity, a DAF is often found to be the more practical choice, however many donors also establish both a private foundation and a DAF, using these vehicles for distinct, yet complementary purposes.

Charitable LLCs and trusts: expanding the toolkit

Beyond DAFs and foundations, other vehicles such as charitable LLCs or charitable remainder trusts may provide additional ways to align philanthropy with broader wealth transfer goals. Each structure has unique advantages, and the right fit will depend on a donor’s individual circumstances, estate plan, and philanthropic vision.

Planning for impact

At its best, philanthropy is about creating lasting, meaningful change. A thoughtfully structured DAF can offer a seamless way to amplify your impact today while also building a charitable legacy for tomorrow.

If you are considering a DAF or wondering whether another charitable structure may be a better fit, we invite you to connect with your Corient Wealth Advisor. Together, we can design a giving strategy that reflects your values, meets your tax and estate planning needs and stands the test of time.

ABOUT THE AUTHOR