Leveraging Donor-Advised Funds (DAFs) for Family Offices and Emerging Venture Capital Managers
Donor-advised funds (DAFs) provide a powerful, tax-efficient vehicle for philanthropy while offering significant investment and strategic giving opportunities. Whether utilized for personal giving, venture philanthropy, or ecosystem-building efforts, understanding how to leverage DAFs effectively can unlock long-term impact while aligning financial and philanthropic goals.
What is “Venture Philanthropy” and how did it start?
Venture philanthropy refers to when donors actively engage and support organizations to maximize their social impact over the long-term. John D. Rockefeller III first coined the term in the 1960s when he described it as “an adventurous approach to funding unpopular social causes.”
Not all philanthropy throughout the 20th century was as strategic or involved as Rockefeller’s. It was typically individuals passively writing checks and large foundations making grants. Without ongoing involvement or tools to measure, it was difficult to pinpoint the impact of any donation.
The tide shifted in the late 1990s and early 2000s as entrepreneurs in Silicon Valley pushed to create a philanthropic model that encompassed the very business tenants that made them successful. Like venture capitalists, donors could:
Use their expertise to select the best recipients of their funds and then measure the effectiveness of these selections.
Attract additional funding by empowering stakeholders and creating an environment of collaboration and innovation.
Leverage all the tools that are available to create change, including unconventional ones.
As technology has evolved and information networks have improved, venture philanthropy has become much more accessible particularly via donor-advised funds. donor-advised funds now make up over a quarter of all philanthropic giving in the U.S.
What is a donor-advised fund, and why are they important?
A donor-advised fund (DAF) is a powerful, flexible giving vehicle for individuals and venture capital managers looking to align philanthropy with investment strategy. They function like a private foundation but have the operational simplicity of a checking account.
At a high level, donors contribute assets into a donor-advised fund and receive an immediate charitable income tax deduction. Because the donor-advised fund sponsor is a 501c(3), it does not pay taxes on selling the contributed asset. The donor now has a pool of cash in their donor-advised fund that they can either invest or distribute out to charity. The donor controls when and to what charitable organizations they give to, and most DAF sponsors do not have a mandatory amount that needs to be distributed in a single year. Some donors fund their donor-advised fund and have it stay invested, compounding the impact they will be able to make with their philanthropy in the future.
Typically, the average payout of donor-advised funds has hovered around 20% for every year on record. This leaves over $250 billion in untapped philanthropic on the table. DAFs present an underutilized opportunity to drive both impact and financial efficiency. Understanding how to leverage DAFs effectively can unlock long-term value while actively supporting strategic philanthropic goals.
What are the pros and cons of a donor-advised fund?
Pros:
Generally, no start-up costs. Can be established immediately with a DAF provider.
All financial and administrative services are handled by the DAF provider.
Minimal initial contribution.
Does not require a tax return as there are no taxes on DAF investments.
Names of donors can be kept confidential, and grants can be made anonymously.
Ability to accept and receive a tax deduction on most assets.
Flexible distribution terms.
Wide range of investment options.
Cons:
Contributions are irrevocable and non-refundable. Once assets are put into a DAF, donors cannot take them back out. Assets in a DAF and any income or gains earned on those assets must be used for charitable purposes.
The entire value of each grant must be used for charitable purposes. Charitable distributions cannot be made to satisfy legal obligations or provide more than incidental benefits (e.g., purchasing tickets to a charity gala).
Grants should be made to qualified non-profits (501c3) and approved mission-driven companies.
What are the tax advantages of using a DAF?
Donors can contribute to a DAF and receive an income tax deduction in the year they contribute. The amount that donors can deduct is limited to a percentage of their adjustable gross income (AGI).
Cash contributions are limited to 60% of AGI.
Contributions of long-term capital gain property is limited to 30% of AGI.
If both cash and appreciated property are donated within the same year, then the total deduction is limited to 50% of AGI.
If donors are unable to utilize the full charitable deduction in Year 1, they can carry it forward a maximum of five years.
The income tax deduction also depends on whether the contributed property is considered short-term or long-term capital gain property. The long-term holding period is one year plus a day. Short term is property that is held for one year or less. Donors should contribute long term appreciated property to a donor-advised fund to maximize the tax benefit. Long term appreciated property qualifies for a charitable deduction on the full fair market value. By comparison, short term appreciated property only qualifies for a deduction on the donor’s cost basis (e.g., original purchase price of the property).
Example:
A client in California bought 500 shares of XYZ stock in 2015 for $30/share. In 2025, XYZ is trading at $250/share and the client’s position has grown from $15,000 to $125,000. Client has a successful liquidity event and wants to reduce income taxes that year. The client has one of two choices:
Some DAFs also accept more complex assets, such as private stock, closely held business interests, real estate, and art. The tax deduction may be subject to certain discounts for lack of marketability and/or minority interests.
How do DAFs compare to other charitable giving vehicles?
DAFs are one of the most flexible, low-cost, and accessible philanthropic tools available today. Two other charitable vehicles donors may consider are private foundations and charitable trusts:
1. Private Foundations
Forming a private foundation typically entails a significant investment of personal time and effort as well as ongoing legal, accounting, and compliance requirements.
We generally do not recommend establishing a private foundation with less than $25 million.
Foundations have a mandatory payout requirement (typically 5% of the prior year’s average assets).
They are most appropriate if donors want to:
Support gifts to individuals for emergency or hardship assistance, scholarships, prizes, or non-501c3 charities whose mission is aligned with problems the foundation is trying to solve
Hire and compensate family or friends
2. Charitable Trusts
Charitable trusts provide an avenue for donating appreciated property while creating an income stream for a beneficiary or a charity. They can be structured several different ways depending on the donor’s goals and cash flow needs:
Charitable Remainder Annuity Trust
Charitable Remainder Unitrust
Charitable Lead Annuity Trust
Charitable Lead Unitrust
The charitable beneficiary of the trust can be a donor-advised fund or a private foundation.
We generally do not recommend establishing a Charitable Trust with less than $5 million.
These vehicles can be very complementary to each other and can be used in tandem.
How do you choose the right sponsor organization for your DAF?
There are four main categories of sponsor organizations. The right sponsor depends on your philanthropic goals and how you want to engage in the process.
National Sponsors
Example: Fidelity Charitable
A tax-exempt independent or financial institution affiliated organization with a national focus
Appropriate for general giving and low-cost investment choices
Community Foundations
Example: Silicon Valley Community Foundation
A tax-exempt organization that supports the charitable interest of a defined geographic area
Appropriate for donors who want to learn more about issues and target causes in their local community
Single Issue-Charities
Example: Stanford University
A tax-exempt organization that works in a specific philanthropic lane, such as universities, faith-based charities, or issue-specific charities
Mission Driven DAFs
Example: ImpactAssets
Appropriate for donors who are seeking ESG or impact-focused investments
DAFs can easily transfer to other sponsor organizations that are better aligned with a donor’s goals.
How can venture capital funds leverage DAFs?
DAFs represent an underutilized source of patient, mission-aligned capital for venture funds. Programs like ImpactAssets vet opportunities and can help pool multiple donors- who would not qualify on their own- into one limited partner. This helps streamline access to capital that would otherwise be inaccessible and cuts down on the time and effort that goes into VC fundraising.
While fund size and track record influence access, increased engagement with diverse founders and impact-driven investments is needed.
What are compliance and regulatory considerations for accepting DAF investments?
The DAF sponsor organization has an expenditure responsibility, meaning they need to track the funds and ensure they are used for qualified purposes.
For a venture capital fund, a separate offshore vehicle needs to be set up for tax exempt and foreign investors. This blocks unrelated business taxable income.
How can private wealth management firms help clients maximize DAFs?
Financial advisors play a crucial role in maximizing DAF efficiency. At UBS Private Wealth Management, they support in:
Defining a philanthropic vision and creating a framework around it
Guiding clients on establishing and supporting the right charitable vehicles
Facilitating family education around money and core values
Connecting donors with leading social entrepreneurs and organizations across the globe to magnify efforts through UBS Global Visionaries and UBS Optimus Foundation
Providing learning experiences with peers to boost knowledge, skills, and confidence through UBS Collectives
DAFs blend strategic giving with tax efficiency and long-term impact. Whether used for immediate giving or as a vehicle for sustained impact, DAFs empower donors to be more intentional in their philanthropy. By making the most of DAFs, donors can ensure their contributions make a lasting difference in the causes you care about most.
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Sincere appreciation to Lauren Kinch, Financial Advisor with Labyrinth Wealth Advisors at UBS, for her contributions and insights. Along with Shea Tate-Di Donna and Kaego Ogbechie Rust, authors of The Venture Fund Blueprint.
To see more like this, buy The Venture Fund Blueprint book on Amazon, sign-up for our newsletter, engage us to collaborate with your organization, and follow us on social media.
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Disclaimer: The providers, companies, examples, products, and services shared represent only a subset of available options and are based solely on internal fund manager conversations. These options are intended to be a general framework, not an exhaustive catalog, and should not be viewed as legal or tax advice, endorsements, recommendations, approvals, or rankings. We encourage you to do additional research into each category to find the resources that best fit your specific needs.
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