After selling a business, founders often face a significant one-time liquidity event and with it, a substantial tax obligation. For those looking to align tax planning with long-term philanthropic goals, donor-advised funds (DAFs) have become an increasingly popular and flexible charitable vehicle.

DAFs allow founders to make a charitable contribution at the time of a liquidity event, receive an immediate tax benefit, and then distribute funds to charitable organizations over time. In effect, they offer a way to decouple the tax timing of a donation from the timing of charitable distributions.

This post explores how DAFs work, why they are commonly used following a business sale, and the regulatory considerations donors and advisers should keep in mind.

What Is a Donor-Advised Fund?

A donor-advised fund is a charitable giving account sponsored by a public charity (the “DAF sponsor”). When a donor contributes assets to a DAF:

• The contribution is irrevocable

• The donor receives an immediate charitable tax deduction

• The donated assets are held in a dedicated charitable account

• The donor retains advisory privileges—not ownership—over future distributions

From a legal standpoint, the assets belong to the sponsoring charity once contributed. However, as a practical matter, DAF sponsors almost always follow donor recommendations so long as they are legally permissible.

How Donor-Advised Funds Work in Practice

1. Initial Contribution and Tax Treatment

A donor contributes cash, publicly traded securities, or (in some cases) privately held business interests to the DAF. The donor receives the full tax benefit in the year of contribution, subject to applicable adjusted gross income (AGI) limitations.

For founders who have just sold a business, this can be particularly attractive as it allows charitable deductions to offset a year of unusually high taxable income.

IRS guidance on charitable deductions:
https://www.irs.gov/charities-non-profits/charitable-contributions

2. Investment and Growth of DAF Assets

Once contributed, DAF assets can be invested and managed over time. The donor typically recommends an investment adviser—often their existing financial adviser—to manage the account.

Key features:

• No required minimum distributions

• Assets may remain invested indefinitely

• Investment growth is tax-free within the charitable structure

DAFs are often described as a “charity of charities”, functioning as a long-term charitable reserve that can support philanthropy across decades or even generations.

3. Advisory Privileges and Distributions

Although the donor no longer owns the assets, they retain the right to recommend:

• When distributions are made

• Which qualified charities receive grants

• The size and timing of grants

The DAF sponsor conducts due diligence on proposed recipient organizations to ensure compliance with applicable law, including:

• Sanctions and anti-terrorist financing rules (OFAC)

• Prohibitions on self-dealing or donor benefit

• Charitable qualification under IRS rules

So long as a recommended distribution is lawful, sponsors almost universally approve it. While sponsors technically retain discretion, declining donor recommendations would undermine the commercial viability of the DAF model.

Fees and Economics of a DAF

DAFs involve two primary cost components:

• Administrative fees paid to the DAF sponsor (typically a percentage of assets annually)

• Investment management fees paid to the donor’s selected adviser

Despite these costs, many donors view DAFs as efficient vehicles given:

• The immediate tax benefit

• Administrative simplicity

• Long-term flexibility

• Centralized charitable recordkeeping

DAFs as an Estate and Legacy Planning Tool

Because there is no requirement to distribute assets within a specific timeframe, DAFs are frequently incorporated into estate planning.

Common uses include:

• Naming successor advisers (children or family members)

• Funding multi-generational philanthropic strategies

• Creating a family-guided charitable legacy without forming a private foundation

Regulatory Watch: Proposed IRS Rules on Adviser Compensation

The Internal Revenue Service has previously proposed regulations that could materially change how DAFs operate—particularly regarding investment adviser compensation.

Under the proposal:

• If a donor’s personal investment adviser manages both the donor’s personal assets and the DAF assets, the adviser could be treated as an extension of the donor

• Any compensation paid from the DAF to that adviser would be deemed an improper benefit

• The adviser could face a 100% excise tax on the compensation received

Proposed regulation background:

If adopted, these rules would significantly disrupt current DAF practices by making it economically impractical for advisers to manage DAF assets for existing clients.

To date, however, the proposal has stalled and appears unlikely to be finalized in the current regulatory environment. Still, donors and advisers should monitor this issue closely, as adoption would fundamentally reshape DAF governance and economics.

Why Donor-Advised Funds Are Gaining Popularity

DAFs continue to grow because they offer a rare combination of:

• Immediate tax efficiency

• Long-term flexibility

• Minimal administrative burden

• Strategic philanthropic control

For founders exiting a business, DAFs provide a way to act charitably in the year of liquidity, while preserving the ability to thoughtfully deploy funds to charitable causes over time.

Conclusion

Donor-advised funds have emerged as a powerful charitable planning tool, particularly for entrepreneurs navigating the tax and liquidity implications of a business sale.

By allowing donors to lock in a charitable deduction upfront while retaining advisory influence over future giving, DAFs bridge the gap between financial planning and philanthropy. While regulatory developments bear watching, DAFs remain a flexible and widely used option for long-term charitable engagement.

For founders, advisers, and estate planners alike, the key takeaway is clear: DAFs are not merely a tax strategy—they are a durable framework for intentional, sustained giving.

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