How donor advised funds work: Contributions, growth, and grants

The first article in this series explained donor advised funds and why they matter for donors giving $10,000 to $75,000 a year. This article goes a level deeper – into the mechanics of how DAF contributions, donor account growth, and grants work.

What follows is a detailed look at the three stages of a DAF’s lifecycle: contributing assets, growing the balance, and awarding grants to charities. The goal is to provide sufficient detail to inform a conversation with your CPA and enough working knowledge so you can decide if a DAF is right for you.

What you contribute impacts your tax deduction

A donor advised fund accepts several types of assets. The tax treatment differs meaningfully by asset type, and understanding these differences is essential to unlocking the strategic value of a DAF.

Cash

Cash is the simplest contribution. You transfer funds to your DAF sponsor, and the contribution is deductible in the year you make it. The deduction limit for cash contributions to a DAF is 60% of your adjusted gross income (AGI). At a hypothetical $450,000 AGI, that means up to $270,000 in cash contributions could be deducted in a single year.

One important change for 2026 is that under the One Big Beautiful Bill Act (Public Law 119-21) the first 0.5% of your AGI in charitable contributions is no longer deductible. At $450,000 AGI, that floor is $2,250. So if you contribute $62,000 in cash, your deductible amount is $59,750, not $62,000. This floor applies regardless of asset type and carries over to carryforward years as well. See IRS Publication 526 for the full deduction rules.

Cash contributions are straightforward, and for many donors they’re the default. That said, they’re rarely the most tax-efficient option, particularly for donors who hold appreciated securities.

Publicly traded securities

This is the contribution type that produces the largest tax advantage for most high-net-worth donors – and it’s the primary reason DAFs have grown so rapidly among this group.

When you contribute publicly traded stock that you have held for more than one year, two things happen simultaneously. First, you receive a charitable deduction for the full fair market value of the shares on the date of contribution — not your original cost basis, but the current market value (see IRS Publication 561 for rules on determining the value of donated property). Second, you avoid realizing the capital gain entirely. No sale occurs. No capital gains tax is triggered. No net investment income tax applies.

The practical impact at a realistic scale: consider a household contributing $62,000 worth of stock with a cost basis of $18,000 – meaning $44,000 of the value is unrealized gain. If they sold the stock and donated cash, they’d owe federal capital gains tax at 15%, plus the 3.8% net investment income tax, plus state income tax. In Illinois, that’s 4.95%.

The combined federal and state rate on that $44,000 gain is approximately 23.75%. That translates to roughly $10,450 in taxes that simply don’t exist when the shares are contributed directly to a DAF. Using a DAF direct stock contribution, the household will still receive the full $62,000 deduction (minus 0.5% AGI floor). The charities they support will receive the full $62,000 in value. The only party that will receive less is the tax authority.

The deduction limit for appreciated securities is 30% of AGI – lower than the 60% cash limit. At $450,000 AGI, that cap is $135,000. For donors contributing at the scale described above, this limit is rarely binding. Any excess above the 30% limit can be carried forward for up to five years.

Other accepted assets

Some DAF sponsors accept contributions of privately held stock, real estate, limited partnership interests, and cryptocurrency. These asset types involve additional complexity – qualified appraisals are often required, sponsors must agree to accept the assets, and timelines for processing may be longer. The tax treatment can be highly favorable, particularly for illiquid assets with large embedded gains, but the mechanics are beyond the scope of this article. If you hold significant appreciated assets outside of publicly traded securities, this is a conversation to have with your CPA or tax advisor.

How the growth phase works

Once assets are contributed to a DAF, they’re held by the sponsoring organization – a public charity that administers the fund on your behalf. You select an allocation from a menu of options offered by the sponsor.

Most sponsors offer between five and fifteen allocation options, ranging from money market and short-term bond allocations to balanced and growth-oriented equity portfolios. Some sponsors also offer socially responsible or impact-focused allocations. You can change your selection at any time, and there’s no tax consequence to reallocating within the fund.

This is the critical distinction: all activity inside the DAF – dividends, interest, realized gains from rebalancing – happen within a tax-exempt vehicle. There are no capital gains taxes, no dividend taxes, and no income taxes on any growth in the account. The full value of the fund, including all accumulated growth, stays available for future charitable grants.

A practical illustration: a $62,000 contribution placed in a balanced allocation that produces approximately 7% annualized growth would grow to roughly $87,000 over five years. That’s $25,000 in additional value available for grants to your chosen charities – value that wouldn’t exist if the contribution had been granted immediately. The growth language matters here: this isn’t investment return to you – it’s increased capacity for future giving. You don’t have access to these funds for personal use. They’re irrevocably committed to charitable purposes.

There’s no required timeline for distributing funds from a DAF. Assets can remain in the fund for months, years, or decades. Some donors contribute and grant within the same year. Others build a balance over time and grant strategically as needs and opportunities arise. Article 7 in this series explores the strategic implications of separating the contribution decision from the granting decision in more detail.

How grants work

The donor-advised fund granting process is where your “advisory” role becomes most tangible. When you’re ready to support a charity, you submit a grant request to your DAF sponsor – typically through their online portal. The request specifies the recipient organization, the dollar amount, and whether the grant should be anonymous or attributed to you.

The sponsor reviews the request to confirm that the recipient is an IRS-qualified 501(c)(3) organization. In practice, more than 99% of grant requests are approved. The review is a compliance check, not a judgment call on your charitable priorities. Most sponsors process approved grants within one to five business days.

Grants can be one-time or recurring. Many sponsors allow donors to set up automatic recurring grants – monthly, quarterly, or annually – to organizations they support on an ongoing basis. For a household that donates to six organizations, this means six grant requests can replace six separate December transactions, each with its own receipt and tracking burden.

Minimum grant amounts vary by sponsor. Some set the floor at $50, others at $250 or $500. There’s no maximum, and there’s no deadline by which grants must be made. This flexibility is one of the features that distinguishes a DAF from direct giving: you can contribute in a year when the tax benefit is most valuable and grant in a year when the charitable need is greatest. These two decisions don’t need to happen at the same time.

One point that concerns some prospective donor-advised fund holders: the word “advised.” You request grants; the sponsor technically approves them. In legal terms, the contributed assets belong to the sponsoring organization once contributed. In practical terms, you retain effective decision-making authority over how and when funds are distributed. The distinction is legally significant and practically invisible. Your grants go where you direct them.

The day-to-day experience

For many prospective DAF holders, the biggest uncertainty isn’t tax mechanics or allocation options – it’s what managing a DAF feels like on a Tuesday evening or a Saturday morning. The short answer: it’s simpler than managing a brokerage account.

Most sponsors provide an online dashboard that displays account balance, current investment allocation, contribution history, grant history, and year-to-date tax receipts. Recommending a grant takes less than five minutes. Changing an investment allocation takes less than two. There are no forms to file with the IRS beyond what you’d already include on Schedule A of your tax return – and the sponsor provides a single annual statement summarizing all contributions and grants for the year.

For donors who currently track six separate charitable receipts, coordinate year-end giving across multiple organizations, and manage the logistics of stock transfers to individual charities, a DAF consolidates all of that into a single account with a single dashboard. The administrative simplification alone is a meaningful quality-of-life improvement for busy professionals.

One additional consideration: fees. DAF sponsors charge administrative fees that typically range from 0.15% to 0.60% of the account balance annually. On a $62,000 account, the difference between a 0.60% fee and no fee is $372 per year – money that either goes to the sponsor or stays available for future grants. Some sponsors now charge no administrative fees at all. Investment fees (the expense ratios of the underlying funds) apply separately and vary by allocation. It’s worth comparing both fee layers before selecting a sponsor.

A practical example: from contribution to grant

Consider a married couple – both professionals, household AGI of $450,000, donating $62,000 per year to six organizations. One spouse holds RSU grants from a publicly traded employer. The shares have a cost basis of $18,000 and a current fair market value of $62,000.

In their current approach, they sell shares when they vest, pay capital gains taxes on the appreciation, and donate cash to their charities in December. Each year, approximately $10,450 goes to federal and state taxes on the gain – money that could otherwise support their charitable goals.

With a DAF, the sequence changes. In early spring, the couple contributes $62,000 of appreciated shares directly to their donor-advised fund. No sale event occurs. No capital gains tax is owed. No net investment income tax applies. The full $62,000 enters the fund.

They select a balanced growth allocation. Over the next 7-8 months, the total value available for future grants grows to approximately $64,700 – assuming 7% annualized growth. Meanwhile, they request grants to their six organizations on whatever schedule works best: some immediately, some quarterly, some at year-end.

By the end of the year, the same charities have received the same support. The couple has received their tax deduction. And the roughly $10,450 that previously went to capital gains taxes has instead remained within the charitable ecosystem – available either as part of this year’s grants or as growth in the fund’s capacity for future giving.

Over a two-year period, the tax improvement from the stock-versus-cash switch alone is approximately $21,000. The charities are no worse off. The couple’s giving experience is simpler. And the tax savings are real, recurring, and entirely within the bounds of what the tax code is designed to encourage.

What comes next

This article covered the mechanics – what you can contribute, how the growth phase works, and how grants are requested and processed. If you’re evaluating whether a DAF fits your situation, these are the details that allow you to have an informed conversation with your CPA or financial advisor.

The next article in this series walks through how to set up a donor advised fund – what to expect from the process and what decisions you’ll need to make. If you want to go deeper on the strategic separation between contributing and granting, Article 7 covers that topic in detail. And if you’ve already opened and funded a DAF, Article 11 walks through the first 90 days of active use.

If you want to see how the stock-versus-cash math applies to your specific situation, that’s a conversation your CPA can model in about fifteen minutes.

Sources

IRS Publication 526, Charitable Contributions. https://www.irs.gov/forms-pubs/about-publication-526

One Big Beautiful Bill Act (Public Law 119-21). https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions

Internal Revenue Code Section 4966 — Donor Advised Fund statutory definition. https://www.law.cornell.edu/uscode/text/26/4966

DAF Research Collaborative, 2025 Donor-Advised Fund Report. https://www.dafresearchcollaborative.org/annual-daf-report/2025

IRS Publication 561, Determining the Value of Donated Property. https://www.irs.gov/forms-pubs/about-publication-561