For many investors, charitable giving is not just an act of goodwill, it’s a core component of their financial plan. One of the most flexible and tax-efficient tools available for philanthropic giving is the donor-advised fund (DAF). Whether you’ve had a high-income year, received a large bonus, or exercised a significant number of stock options, a DAF can help you support the causes you care about while optimizing your tax situation.

So, how does it work, and why do so many philanthropically-minded investors incorporate a DAF into their long-term planning?

What Is a Donor-Advised Fund?

A donor-advised fund is a charitable investment account specifically designed to support giving over time. You contribute assets, like cash, appreciated stock, or other investments, to the fund, receive an immediate tax deduction in the year of the contribution, and then recommend grants from the fund to qualified charities at your own pace.

Think of it as a giving account with built-in tax advantages and long-term flexibility. You don’t have to choose all your charitable recipients upfront. Instead, you can make one large contribution in a year when it makes the most financial sense for you, then distribute funds to different nonprofits over time, sometimes over many years.

The Strategic Value of a DAF

A key advantage of a donor-advised fund is its ability to decouple your tax deduction from the timing of your charitable donations.

Suppose you experience an unusually high-income year, from exercising options, selling a business, or receiving a large bonus. You want to support several charities, but you’re not sure which ones yet. By contributing to a DAF in that high-income year, you can offset a portion of your income with a charitable deduction, even if the actual donations to specific nonprofits don’t happen until future years.

This flexibility is especially valuable for executives, business owners, or professionals with fluctuating income. It’s also a great tool for families aiming to build a long-term philanthropic legacy without the cost or complexity of a private foundation.

Cash vs. Appreciated Stock: A Clear Tax Advantage

Donating cash is simple, but contributing appreciated stock often unlocks significantly greater tax advantages, particularly for long-held or highly appreciated investments.

Let’s say you own company stock that’s significantly increased in value. If you sold the stock outright, you’d pay capital gains taxes on the growth. But if you contribute that appreciated stock directly to a DAF, you can avoid paying capital gains tax entirely and still receive a charitable deduction for the full fair market value of the gift.

That’s the “double benefit”:

• Avoid capital gains tax entirely.
  
• Receive a full fair market value deduction, up to IRS limits, against current income.

This is especially compelling if you’ve held the stock for many years or are sitting on concentrated positions from a legacy holding or employer equity.

Turning a High-Income Year Into a Charitable Opportunity

If you’re having an unusually high-income year — maybe from a big bonus, a business windfall, or exercising stock options — you’re probably also thinking about the tax bill that’s coming with it. And if you’ve also been holding onto appreciated stock that’s grown in value over the years, there may be a smarter way to give back and reduce your tax liability at the same time.

Imagine you have $100,000 worth of stock that you’ve held for a long time. You originally paid much less for it — so selling it outright would trigger a hefty capital gains tax bill. But by donating the stock directly to a DAF, here’s what happens:

• You avoid capital gains taxes entirely on the appreciated value — potentially saving over $20,000 in taxes if you’re in a high bracket.
• You get a full charitable deduction for the fair market value of the stock — in this case, $100,000 — which can help offset the high income you’re earning this year.
• You don’t have to rush your giving. The money sits in your DAF and can be granted out to charities over time, on your own schedule.

What Happens After the Contribution?

Once you’ve funded the DAF, you can begin recommending grants to your favorite charitable organizations. These grants can be made over years, even decades, depending on your giving timeline. Most DAFs offer online platforms that make it easy to manage your account and schedule recurring or one-time gifts.

It’s important to note: your tax deduction occurs when you contribute assets to the DAF, not when the DAF sends funds to specific charities. This timing distinction is key for planning purposes. The contribution is considered a completed charitable gift, even if you delay actual disbursements to nonprofits for years.

Because DAFs grow tax-free while invested, your giving power can grow if you delay distributions.

Why It Makes Sense for Many Investors

Donor-advised funds appeal to many individuals and families, particularly those who:

• High-income earners looking to offset taxable income in a peak year.
• Executives and tech professionals managing equity compensation.
• Investors seeking to diversify out of appreciated stock positions tax-efficiently.
• Philanthropic families who want to involve younger generations in long-term giving.
• Anyone who wants to simplify recordkeeping with a single charitable deduction and centralized giving vehicle.

They’re also a useful alternative to setting up a private foundation, offering similar benefits with less administrative burden and lower costs.

With a DAF, you get the deduction when it helps the most, while also making a meaningful impact through your giving long-term. It’s a win-win — less to the IRS, more to the causes you care about.

Final Thoughts

A donor-advised fund is more than just a tax strategy. It’s a way to be intentional about your giving, balancing generosity with smart planning. Whether you’re navigating a year of high income or looking to create a legacy of charitable impact, a DAF offers the flexibility to give when the time is right, for both you and the causes you care about.

If you’re holding appreciated assets, facing a high-income year, or simply want to streamline your giving, a donor-advised fund may be worth exploring. With the right guidance, you can align your charitable values with meaningful financial benefits, now and for years to come.

Curious whether a donor-advised fund could be a fit for your financial plan?

Navalign Wealth Partners can help you evaluate your options, structure contributions for maximum impact, and create a charitable giving strategy that aligns with your goals. Reach out today to get started!