Should You Use a Donor Advise Fund (DAF) After 2025 Market Rally

There are two weeks left before we close the books on 2025, and that still may be enough time for some last-minute tax planning. Barring a late collapse, the stock market is poised to have enjoyed its third consecutive year of strong performance. The S&P 500 is up roughly 16% year-to-date at the time of this writing. The index could possibly post back-to-back-to-back 20%+ year returns for a three-peat. With the markets hovering around all-time highs, and continually breaking records over the past few years, many investors are considering rebalancing a portfolio that may have become overweight in equities.

Herein lies the difficulty with year-end planning. For nonqualified or non-retirement, investment accounts in which taxes are not deferred, portfolio adjustments are likely to trigger capital gains taxes. These can come in two forms: long-term, investments held for over 12 months, and short-term, investments held for less than 12 months. In 2025, long-term capital gains taxes are 0% for married filing jointly with taxable income below $94,050 ($47,025 for single filers), 15% for those between $94,050 and $583,750 ($518,900 single), and 20% for those above the 15% threshold plus an additional 3.8% Medicare surtax . Short-term gains are taxed more heavily by being added to the investor’s ordinary income. Depending on what state you live in, there could be additional taxes on top of this. These taxes may pose a problem, but as I often like to say, it’s a good problem, it means your money is growing.

There are several strategies to help mitigate capital gains taxes such as tax-loss harvesting, securities-based lines of credit, or holding the asset until death for a potential step-up in basis. Each of these approaches has pros and cons. Tax-loss harvesting, the selling of assets at a loss to offset capital gains, may be difficult if most of the portfolio is positive. Securities-based lines of credit come with fees and interest charges. The step-up in basis may be a long way off for younger investors who want to enjoy the asset themselves.

One strategy investors in this situation could consider, particularly if they are charitably inclined, is donating their appreciated asset. Since 501(c)(3) nonprofit organizations are exempt from paying taxes, investors can take the asset they are considering selling at a capital gain and donate it to a charity. That charity can then liquidate the asset, without incurring any taxes, and use the proceeds for their cause. It can be a win-win scenario in which the charity receives the donation, just as valuable as any other cash donation, and the investor completely avoids the capitals gains tax while also possibly locking in a charitable deduction on their tax return.

The strategy works best when charitable intent and tax planning run on parallel paths. If the investor already plans on donating money to their favorite charity, church, school, etc., they can reach the same end goal by donating an appreciated asset rather than cash from their savings. If it’s all the same to the tax-exempt charity; why pay unnecessary taxes when the asset subject to capital gains tax could be gifted in place of a cash donation?

You may be saying to yourself, “But I don’t know which charities I want to give to this year?” Or, “I have a lot more assets subject to capital gains tax than I’d normally donate from my savings.” In steps the Donor Advised Fund (DAF). A DAF can act as a placeholder before the donor has fully made up their mind as to where the donations should end up. However, it gives the donor a current tax deduction just as if they donated directly to a 501(c)(3) organization. Once assets are inside the DAF, the account owner can continue investing them for future growth and make grants to qualified charities without any time constraint.

Funding a DAF can work well in the following scenarios:

• High-income year from a bonus or business sale. The donor can take the tax deduction this year, but give to charities over time.
• Donating appreciated assets. This avoids capital gains tax and still gives a deduction for the asset’s fair market value.
• Bunching deductions. The investor/donor wants to give over multiple years but doesn’t know to which charities, and they want the maximum deduction this year.

Donors should note that funding a DAF is an irrevocable contribution, just like if it went outright to a charity. DAF’s can be an option to consider with much less complexity than starting a foundation, but with the benefits of long-term charitable planning with current tax year advantages.

This approach is one of several that may be considered within an overall financial plan. Investors should be aware of the tax consequences of their various investments and account types (i.e. taxable, tax-deferred, and tax-free) and their liquidity values. Understanding long-term consequences and estate planning consequences can allow investors with long-term horizons to work backwards to current-day decisions.