Think of a donor-advised fund as a personal philanthropy checking and savings account. An individual donor, couple, or family creates an account (a donor-advised fund) by transferring assets to a sponsor or sponsor organization, such as a community foundation, a religious federation, or a commercial gift fund. Those assets may be cash, appreciated stock, real estate, or other financial or business assets. The transfer is irrevocable and is considered a complete charitable gift according to the IRS—meaning the donor takes an immediate tax deduction.
When donors establish a DAF, they are giving assets to a 501(c)(3) nonprofit which then owns the fund. While donors give up legal control of the assets, they maintain advisory privileges on the fund. Over time, donors recommend grants from their account to charitable organizations they care about.
Ultimately, the sponsor organization owns the assets and has the final say; yet, sponsor organizations take their donor recommendations seriously. While sponsors rarely disapprove a donors’ recommendation—for example, if the recommended grant conflicts with the sponsor organization’s mission—the law requires that the sponsor must formally approve all grant recommendations before funds can be distributed. The sponsor must have a system (typically staff or a database) to vet organizations recommended for a grant and to confirm the organizations have 501(c)(3) designation. If an organization does not have this designation, the Board will not approve the grant.
A Brief History of Donor-Advised Funds
The New York Community Trust pioneered the first donor-advised fund in 1931, and for decades, community foundations and Jewish federations offered them exclusively. In the 1970s, an entrepreneurial activist named Drummond Pike created the Tides Foundation, which used donor-advised funds to marshal resources for progressive causes—in essence, creating a new kind of community foundation where the glue was a shared worldview.
In 1986, the Tax Reform Act imposed more stringent reporting obligations and payment deadlines on private foundations. As a result, donor-advised funds emerged as a more attractive giving option than private foundations that required substantial management and oversight. In 1991, Fidelity Investments established the first commercial gift fund (now known as Fidelity Charitable) as an independent public non-profit.
In 2006, the Pension Protection Act (PPA) legally defined a donor-advised fund for the first time, and provided rules and requirements to govern their use. The PPA defined donor-advised funds as:
- A fund or account owned and controlled by a section 501(c)(3) sponsoring organization;
- which is separately identified by reference to contributions of the donor or donors; and
- where the donor (or a person appointed or designated by the donor) has or reasonably expects to have advisory privileges over the distribution or investments of the assets.
All three prongs of the definition must be met in order for the IRS to treat a fund or account as a donor-advised fund.
Next in the DAF Guide: When is the best time to start a donor-advised fund?
 Callahan, David. “Donors Trust: Mission Driven Donor-Advised Fund. Inside Philanthropy,” August 23, 2017.