Do you have a DAF? How you invest can make a big difference

Donor-advised funds (DAFs) are one of the fastest-growing forms of philanthropy in the United States, with more than $52 billion given to charities in 2023.

One of the many benefits of DAFs is the potential for tax-free gift growth, which can have a huge impact. For example, Daffy members put aside more than $105 million for charity last year, and since then their accounts have grown by more than $30 million—an incredible amount of money raised for charity.

Unfortunately, there is little guidance on developing an investment strategy for a DAF, which is distinctly different from choosing investments for a retirement account. In the case of a retirement account, the primary factors influencing investment decisions are typically time horizon and risk tolerance. Often, there is a single goal: building a large enough cash reserve to last through retirement.

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DAF goals, however, can vary widely. Some donors give regularly, matching their annual gifts to weekly or monthly deposits. Others give opportunistically, overdrafting their accounts during profitable years to support giving during lean times. In addition, some donors aim to create a long-term fund that supports annual gifts to specific charities for decades or even indefinitely, like a trust.

As a result, designing the right portfolio for a DAF requires understanding the donor’s giving strategy.

How to Match Your Investment Strategy to Your Donation Goals

Let’s look at a few scenarios to illustrate the different strategies donors can use when investing through a DAF.

Pay-as-you-use plan. Imagine a client named Leah. Leah uses her DAF to donate about $5,000 a year to her child’s school, along with several other local and national charities. She gave $2,000 up front to prepare for an upcoming fundraiser for the school and set up a recurring monthly payment of $300 to support her ongoing giving.

Since Leah plans to distribute most of her contributions this year, she would likely benefit from a conservative portfolio allocated to short-term Treasury bills.

Development plan. Now consider Neal and Sarah. The couple’s income is fairly stable most years, but Neal’s company went public this year, which resulted in a significant gain on the stock. They typically contribute about $10,000 per year, but this year they decided to put $100,000 into their DAF to help them manage the increased tax burden from selling Neal’s stock. As a result, most of the funds in their portfolio will be invested for five years or more.

For this pair, a low-cost, globally diversified portfolio of stocks and bonds makes sense. They might even include a small allocation to bitcoin. With a tax-free, automatically rebalanced portfolio in a DAF, their portfolio is exposed to little risk of being overweight to high-risk assets.

(Photo credit: courtesy of Daffy)

Capital plan. Finally, meet Lakshmi and Ajay, who both have successful careers and want to create a lasting family legacy through their DAF. They have funded their DAF with over $750,000 in low-cost mutual fund shares that they have held for over 20 years, thereby avoiding capital gains tax on those investments. They plan to donate $25,000 per year for the next 20 years, with the hope that their children, Justine and Janan, will eventually succeed in managing the fund.

Taking a long-term view, an aggressive, diversified portfolio with growth-oriented investments may be ideal, ensuring their philanthropic efforts can endure for generations.

(Photo credit: courtesy of Daffy)

The impact of a well-thought-out DAF investment strategy

The beauty of a DAF is that it offers the flexibility to tailor your investment strategy to your giving goals, no matter how short-term or long-term they may be. While not all donor advisory platforms in the U.S. offer clients and advisors the flexibility to customize their portfolio, some, like Daffy, do give you the flexibility to choose from hundreds of high-quality, low-cost ETFs to fit your giving strategy. (Full disclosure: I am the co-founder and CEO of Daffy.)

For the 50 to 60 million American households that give to charity each year, giving is not just a one-time transaction. For many households, it is one of the most important financial goals for their family and their legacy.

Whether you want to fund immediate charitable giving, capitalize on market opportunities to maximize future giving, or create a legacy that will benefit future generations, aligning your DAF portfolio with your giving strategy is key to making a lasting impact.

The information provided is for educational purposes only and should not be considered investment advice or recommendations, is not a solicitation to buy or sell securities, and should not be considered specific investment or tax legal advice. Please consult your tax and/or investment advisor to assess your specific situation.

This article was written and represents the views of our advisor, not those of Kiplinger. You can check the advisors’ records using SECTION or with FINRA.