No, donor-advised funds (DAFs) generally cannot give directly to individuals under U.S. federal tax law. In 2023, nearly 1.8 million DAF accounts granted about $55 billion to charities – yet $0 went straight to any one person due to these rules.
- 🚫 Federal Ban: IRS regulations flatly prohibit DAF grants to specific individuals, ensuring funds only support qualified charities.
- 🏛️ State Oversight: State laws and attorneys general reinforce this restriction, with no state allowing a loophole for direct individual gifts.
- 💡 Alternatives: You can help people by giving through nonprofits (e.g. scholarship funds, relief charities) or personal gifts – just not via a DAF check to Joe Smith.
- ⚠️ Steep Penalties: Violating these rules triggers hefty excise taxes (20%+ for sponsors, 125% for benefiting donors), so DAF sponsors won’t approve improper grants.
- 📖 Know the Terms: Key concepts like “sponsoring organization,” “501(c)(3) charity,” and “private inurement” explain why DAFs have these limits – and how to navigate them legally.
Why Federal Law Bans DAF Gifts to Individuals
Donor-advised funds are governed by federal tax law that defines what they can and cannot fund. The Pension Protection Act of 2006 (PPA) established DAFs in the tax code and set strict rules on distributions. A core rule is that DAF grants must go to IRS-qualified public charities – typically 501(c)(3) nonprofits – and not to any specific individual.
The reasoning behind this ban is to prevent private benefit. Charitable dollars that earned a tax deduction shouldn’t enrich a private person or fulfill a personal obligation. Allowing DAF donors to funnel money to a named individual (say, to pay a friend’s bills) could effectively turn charitable accounts into tax-free personal slush funds. To avoid that, IRS Code Section 4966 classifies any DAF distribution to a natural person as a “taxable distribution,” penalized by a 20% excise tax on the sponsoring charity (and 5% on any manager who approved it). In late 2023, the IRS also issued new proposed regulations to further tighten DAF oversight – for example, broadening the definition of a “donor-advisor” to include certain financial advisors who manage DAF assets. While these are not yet final, they signal that regulators are actively monitoring and refining DAF rules (with no suggestion of easing the individual-giving ban).
In practice, DAF sponsoring organizations (the public charities that hold DAF accounts) simply refuse any grant recommendation that names an individual. Whether it’s a request to pay John Doe’s medical expenses or to give a scholarship check directly to a student, the answer will be “no.” The IRS enforcement is backed by severe taxes and the potential loss of the charity’s good standing, so no reputable sponsor will risk it.
Under federal law, even indirect gifts to individuals are barred. For example, you can’t use a DAF to satisfy your own pledge to a charity or to get benefits like gala tickets (these would give you or someone more than an “incidental benefit”). Similarly, you cannot have a DAF grant pass through a nonprofit intermediary if it’s effectively earmarked for a certain person. The bottom line: at the federal level, DAF money must serve broad charitable purposes, not single out specific beneficiaries.
State Oversight: No Loopholes at the Local Level
What about state laws – could any state let DAFs give to individuals? In short, no. State authorities (typically the Attorney General’s charity bureau) oversee nonprofits and make sure charitable assets are used for the public good, mirroring federal principles. No U.S. state carves out an exception that allows a donor-advised fund to cut a check to an individual.
While states may differ in reporting requirements or regulations for charitable organizations, they all uphold the idea that charitable funds cannot benefit private individuals. In fact, if a community foundation or DAF sponsor in any state attempted to route donations to a specific person, it would likely violate state charitable trust laws. State oversight can include audits and investigations to prevent abuse. For instance, California’s Attorney General conducted an audit of DAF sponsors to ensure funds were being granted appropriately (to real charities, not shell pass-throughs).
Some states have pushed for greater transparency and payout rules for DAFs (e.g. proposals to require minimum annual distributions or disclosures), but these efforts do not alter the fundamental restriction on individual grants. At most, state law adds another layer of compliance: DAF-sponsoring charities must register, report their activities, and stick to their charitable purpose. If they diverted funds to a private individual, state regulators would have grounds to intervene, on top of the IRS penalties.
Future Outlook: Nationally, there is active discussion about further regulating DAFs – not to permit individual giving, but to increase transparency and payout. Some members of Congress have proposed laws (such as the Accelerating Charitable Efforts (ACE) Act) that would require DAF contributions to be granted out within a certain number of years to prevent indefinite accumulation of funds. As of 2025, no such federal law has passed, but the momentum suggests continued scrutiny of DAF practices. Importantly, none of these proposals seek to lift the ban on grants to individuals; the focus is on ensuring DAF-held money benefits charitable organizations in a timely manner.
When DAF Giving Gets Personal: Examples & Outcomes
It helps to see how these rules play out in real situations. Consider a donor, Alice, who has a donor-advised fund and wants to help her former teacher pay for cancer treatment. Alice asks if her DAF can send money directly to the teacher. The sponsoring organization must decline. Instead, they might suggest Alice grant to a cancer support charity that could assist patients (without promising it will go to that one person). Outcome: Alice cannot use her DAF as a personal relief fund for her teacher, and she either donates to a relevant nonprofit or gives personal funds outside the DAF.
Another example: Brian tries to use his DAF to fund a college scholarship for a specific student he mentors. He fills in the student’s name on the grant recommendation form. The DAF sponsor flags this and rejects it, citing the PPA 2006 prohibition on scholarships to named individuals from DAFs. Outcome: Brian’s only option through the DAF is to contribute to a general scholarship program at a charity or school, where he can’t earmark the recipient. If he insists on a scholarship for that particular student, he’d have to set up a separate scholarship fund (not donor-advised) or pay the tuition directly (with no DAF involved).
There have also been attempts by donors to circumvent the rules. For instance, a family might establish a small local charity ostensibly to help a particular person or family, then recommend their DAF grant to that charity. But DAF sponsors scrutinize grantees. If the “charity” is essentially a conduit to one individual, the grant will be blocked as an abuse of charitable funds. (One community foundation CEO noted that donors sometimes seek help for a specific neighbor or employee; the foundation can only proceed if it sets up a legitimate relief fund for a broad class of people and makes the beneficiary selection independent of the donor.)
Case Study: The IRS penalized a foundation in one case for using what was effectively a donor-advised fund to benefit the donor’s relatives. The donor had advised grants to a nonprofit that then paid stipends to his family members. Once uncovered, this triggered excise taxes and sanctions. The lesson is clear – even indirect self-dealing or private benefit via a DAF is forbidden and enforceable by law.
These examples show that DAF sponsors act as gatekeepers. The moment a grant advice appears to target a person (or fulfill a personal obligation), red flags go up. Donors aren’t left without options, but they must channel their generosity in permissible ways.
DAF Don’ts: What to Avoid
When managing your donor-advised fund, steer clear of any use that could be seen as providing a personal benefit. Common pitfalls include:
- ❌ Don’t pay personal pledges or bills: You cannot use a DAF grant to fulfill a pledge you made (because that relieves you of a personal obligation), nor can you pay someone’s medical or tuition bills directly.
- ❌ No tickets or perks: Avoid recommending grants that would give you goods, tickets, memberships, or services in return. For example, a DAF shouldn’t buy charity gala tickets on your behalf – such a grant confers a prohibited benefit to you.
- ❌ Don’t earmark individuals: Never try to sneak an individual’s name into the grant purpose or recommend funding a pass-through entity aimed at one person. DAF grants must remain for broad charitable purposes, not “for John Doe’s benefit.”
- ❌ Stick to qualified charities: Ensure every grant is to an eligible nonprofit. DAFs cannot give to political campaigns, for-profit businesses, or to non-501(c)(3) groups unless they meet very specific criteria. If a potential grantee isn’t clearly a public charity, your sponsor will likely reject the recommendation.
- ❌ Avoid self-dealing: Remember that donors, advisors, and their families are “disqualified persons” in the eyes of the IRS. Any grant or loan that enriches or pays a disqualified person (even indirectly) is forbidden. So you cannot use DAF funds to compensate yourself or a family member, or to support a nonprofit that you or relatives control in a way that benefits you financially.
By avoiding these missteps, you protect both your fund’s integrity and your own reputation. When in doubt, consult the sponsoring organization – they have strict guidelines and can advise whether a grant idea is permissible.
Demystifying the Jargon: Key Terms You Should Know
Understanding the terminology behind donor-advised funds will clarify why certain rules exist. Here are some key terms and concepts:
- Donor-Advised Fund (DAF) – A charitable account held at a sponsoring organization (public charity) where a donor contributes assets and can advise (recommend) grants over time. Once donated, funds legally belong to the sponsor, not the donor.
- Sponsoring Organization – The 501(c)(3) public charity that manages DAFs. It could be a community foundation, a national fund (like Fidelity Charitable or Schwab Charitable), or another nonprofit. The sponsor has ultimate control over DAF assets and must approve all grants.
- 501(c)(3) Public Charity – An IRS-recognized tax-exempt nonprofit for religious, charitable, educational, or similar purposes. DAF grants generally can only go to these organizations (or certain private operating foundations). Examples: Red Cross, local food bank, universities. (In contrast, private foundations are also 501(c)(3) but are subject to different rules and usually cannot receive DAF grants.)
- Private Foundation – A non-profit entity typically funded by a single donor or family, which makes grants to charities (and can, with oversight, make grants to individuals for charitable purposes). Private foundations have stricter tax rules (e.g., 5% payout requirement, lower donation deduction limits) but greater control by donors. DAFs are often compared to private foundations as alternative giving vehicles.
- Disqualified Persons – In the context of a DAF, this includes the donor(s), fund advisors, their family members, and any 35%-controlled entities of those persons. Transactions that benefit disqualified persons are prohibited. Essentially, if you advise a DAF, neither you nor your close relatives can receive anything (money, services, benefits) from that DAF’s grants.
- More Than Incidental Benefit – The IRS standard that any benefit to a donor or related party from a DAF grant must be merely incidental (insubstantial). If a grant leads to a benefit beyond a token value – for instance, special recognition, dinners, or anything of tangible value – it violates the rules. (Even something like having a DAF grant pay for a donor’s honor plaque or dinner ticket is more than incidental.)
- Private Inurement – A broad tax law principle stating that no part of a charity’s income or assets can unjustly benefit an insider (like a donor, board member, or their family). The DAF individual-gift ban is one application of this principle: it prevents charitable funds from inuring to the benefit of a private person.
Knowing these terms will help you navigate discussions with fund managers and ensure your grant recommendations stay within legal boundaries.
How to (Legally) Use a DAF to Help Individuals
You may still achieve your philanthropic goals for individuals by structuring your giving correctly. Follow these steps to stay compliant:
- Give to qualified charities only. Identify a legitimate 501(c)(3) organization that addresses the cause your intended individual needs. For example, if you want to help a family whose home burned down, find a disaster relief fund or community nonprofit assisting fire victims.
- Don’t name the individual in your grant. When recommending a DAF grant, keep the purpose general (e.g. “for disaster relief” or “scholarship fund support”). Do not put a specific person’s name or “for John’s expenses” – that will be flagged and denied.
- Use intermediaries for individual aid. If your goal is to help a certain person or family, consider donating to a charity that can support them. Many nonprofits have hardship assistance or scholarship programs. You can contribute to those programs through your DAF, letting the charity select recipients based on need or merit (ensuring it’s a charitable class, not your personal choice).
- Consider establishing a special fund (the right way). If you’re passionate about helping individuals in a particular way (like scholarships for students from your hometown), work with the sponsoring organization. They might allow you to create a non-advised scholarship fund or a field-of-interest fund at the community foundation. In those setups, you relinquish the direct advisory role in choosing recipients, which keeps it compliant with IRS rules.
- Use personal funds for direct gifts. When you simply must assist someone directly – say a friend needs urgent medical bill help – do it outside the DAF. Give a personal gift or contribute via a crowdfunding campaign. While you won’t get a tax deduction for personal gifts, it’s the only way to directly support an individual financially.
- Consult your fund sponsor when unsure. If you have any doubt about a potential grant, talk to your DAF sponsor’s staff or review their guidelines. They deal with these questions regularly. It’s better to ask beforehand than to recommend an improper grant and have it delayed or rejected.
By following these steps, you can honor both the letter of the law and the spirit of your generosity – helping people in need without crossing compliance lines.
Pros & Cons of Donor-Advised Funds
| Pros | Cons |
|---|---|
| Easy Setup: Simple to create – just open an account with a sponsoring charity (no complex legal formation). | Loss of Control: Donation is irrevocable; the sponsoring organization has final say on grants (you only advise, not direct). |
| Immediate Tax Benefits: Get a charitable tax deduction in the year of the gift (with higher deduction limits than a private foundation). | Restricted Giving: Cannot grant to individuals, political campaigns, or non-charities; must adhere to IRS rules and sponsor policies for grants. |
| Low Cost & Hassle: No need to manage investments or filings yourself – the sponsor handles administration, due diligence, and tax reporting for a modest fee. | Fees & Limited Investment Choice: Annual management fees apply, and donors typically choose from the sponsor’s investment options (no hands-on investing like you might have in your own foundation). |
| Anonymity Option: Can grant anonymously or in the fund’s name, which is useful if you want privacy. (Also, DAF grants don’t have the same public disclosure as private foundation grants.) | Less Personal Recognition: If you desire a public philanthropic profile, DAF gifts might not spotlight your name. DAF contributions are aggregated in reports, and lack the personal legacy narrative of a named foundation. |
| Flexibility in Timing: No annual payout requirement – you can contribute in high-income years and grant funds out over time as needed. Funds can grow tax-free in the interim. | Possible Delays in Impact: Without a payout mandate, funds could potentially sit without benefiting charities for years. Critics note that this flexibility can lead to slow distribution of aid compared to immediate direct giving. |
Comparing Options: DAF vs Other Giving Methods
Donor-Advised Fund vs Private Foundation
| Donor-Advised Fund | Private Foundation |
|---|---|
| Setup & Admin: Easy “turnkey” setup—open an account with a sponsor; no separate entity or paperwork required. | Setup & Admin: Must establish a new legal entity (nonprofit corporation or trust), appoint a board, and handle state registration plus annual IRS filings (Form 990-PF). |
| Tax Deductions: Contributions qualify for maximum charitable deductions (e.g. up to 60% of AGI for cash gifts). | Tax Deductions: Donations have lower deduction limits (e.g. 30% of AGI for cash to a private foundation) and additional rules for certain asset types. |
| Annual Payout: No required minimum distribution — grants can be made at the donor’s pace (no 5% rule). | Annual Payout: Legally required to distribute roughly 5% of assets each year to avoid excise taxes for under-distribution. |
| Individual Grants: Not allowed. Cannot grant to specific individuals or fulfill personal obligations. | Individual Grants: Allowed for charitable purposes (scholarships, emergency hardship grants) with oversight. Must follow IRS guidelines (e.g. advance approval for scholarship programs, documentation for needs-based aid). |
| Costs: Low cost and effort — sponsor handles investments, accounting, and due diligence for a fee (often ~0.5-1% of assets annually). | Costs: Higher cost and effort — must manage investments, grants, accounting, and compliance (often requiring staff or advisors). Also pays a federal excise tax (~1.39%) on net investment income. |
| Donor Control & Recognition: Donor only has advisory input (the charity controls the fund). Can choose anonymity or have grants issued in the fund’s name (e.g. “Smith Family Fund”). | Donor Control & Recognition: Donor (or family) board has direct control over all decisions. Can name the foundation (for legacy or recognition), but must publicly report grants and financials each year, increasing transparency. |
Donor-Advised Fund vs Direct Personal Giving
| Donor-Advised Fund | Direct Personal Gift to Individual |
|---|---|
| Tax Impact: Donor gets a tax deduction for contributions (and no gift tax), but the DAF can’t directly benefit a single person. | Tax Impact: No charitable deduction for giving money outright to someone; large personal gifts may also count against the donor’s lifetime gift tax exemption (though casual support is usually untaxed). |
| Recipient Eligibility: Can only grant to IRS-qualified charities (which then aid individuals broadly). Cannot target a specific person. | Recipient Eligibility: Can give to anyone you choose — friends, family, or strangers. There’s no legal restriction on who you can support with personal funds. |
| Accountability: The DAF sponsor conducts due diligence; funds must be used by the recipient charity for legitimate charitable purposes. There’s institutional oversight on how funds are used. | Accountability: No formal oversight once the gift is made. The individual can use the money as they see fit. The impact relies entirely on trust and the recipient’s circumstances. |
| Flexibility: Subject to charitable use only — funds can’t be used for non-charitable expenses or personal needs directly. | Flexibility: Extremely flexible – the money can help with any need the individual has (rent, bills, education, etc.). However, once given, the donor has no control over how it’s spent. |
The DAF Ecosystem: Donors, Sponsors, Regulators, and the Law
Multiple players are involved in keeping donor-advised funds operating within legal bounds:
Donor vs. Sponsor: When you contribute to a DAF, you (the donor) get an immediate tax deduction and become an advisor on the fund. The sponsoring organization (charity) legally owns the assets and is responsible for ensuring grants are proper. This dynamic means the sponsor can say “no” if your recommendation would violate the law or their policies. Donors and sponsors work together, but ultimately the charity’s board must approve every grant.
Sponsor & IRS: Sponsoring organizations must follow IRS regulations for DAFs to maintain their tax-exempt status. They file an IRS Form 990 each year (reporting DAF grants in aggregate). If a sponsor approves a taxable distribution – like a grant to a non-charity or an individual – the IRS can hit them with a 20% excise tax on that amount (per Section 4966). Additionally, any fund manager who knowingly agrees to an improper grant can be taxed 5% of the amount (up to $10,000). These laws create a strong incentive for sponsors to stick to the rules. The PPA 2006 and subsequent IRS guidance form the core regulatory framework.
State Regulators: State Attorneys General also oversee charities. They can investigate or sanction a nonprofit that misuses funds. If a DAF were used in a way that violated charitable trust principles (say, benefiting a private individual without a proper program), state authorities could take action against the charity’s directors. States require charities to act in the public interest, so state law echoes the IRS stance: charitable funds must benefit a charitable class, not an insider or specific private party.
Donor Liability: What about the donor or advisor? Normally, if you recommend a bad grant, the sponsor simply refuses it. But if a donor-advisor somehow circumvented the process and a DAF grant provided them (or their relative) a benefit, the IRS can penalize that individual. Under Section 4967, a donor or advisor who receives more than an incidental benefit from a DAF distribution faces an excise tax of 125% of the benefit’s value. In practice, this is rare – sponsors prevent disallowed grants before they happen – but the law is on the books to deter any attempt to game the system.
All these checks and balances ensure that donor-advised funds serve genuine charitable goals. The donor gains flexibility and tax advantages, the sponsor stewards the funds under legal oversight, and regulators (federal and state) stand guard against any misuse.
FAQ: Donor-Advised Funds & Individual Giving
Q: Can I pay a friend’s medical bills through my DAF?
A: No. You cannot directly support an individual with DAF funds. Instead, you could donate to a medical charity or relief fund that assists patients (but the grant can’t be earmarked for your friend).
Q: What if I recommended a grant to an individual by mistake?
A: The DAF sponsor will decline it. You won’t be penalized for asking, but you’ll need to redirect the grant to an eligible charity. Sponsors review grants to ensure compliance before money goes out.
Q: Are there any exceptions for emergencies or hardship cases?
A: Not directly. Even in disasters, a DAF can only give to charity-run relief funds, not to families or individuals outright. The charity itself must decide which individuals receive aid.
Q: Why are DAFs barred from helping individuals one-on-one?
A: Because donations to DAFs got a tax break, the law requires they serve public interests. Letting donors funnel tax-advantaged money to specific people would undermine the charitable purpose and invite abuse.
Q: Can my private foundation give money to individuals if my DAF can’t?
A: Yes, within limits. Private foundations may fund individuals for charitable purposes (e.g. scholarships, disaster relief) but must follow strict IRS procedures and cannot benefit the foundation’s insiders.
Q: Is donating from my DAF to a personal GoFundMe allowed?
A: No. DAF grants can only go to 501(c)(3) charities. Personal GoFundMe campaigns for individuals don’t qualify. (GoFundMe does have a charity platform — DAFs can donate there if a registered charity is the beneficiary.)
Q: What happens if a DAF breaks these rules?
A: The IRS can impose taxes on the sponsoring charity (20% of the amount mis-granted) and on managers or donors who approved or benefited. Violations are taken seriously, so sponsors rigorously avoid improper grants.
Q: Can I move DAF money into my own private foundation?
A: No – IRS rules prohibit DAF grants to most private foundations. You can’t use your donor-advised fund to bankroll a separate private foundation or supporting organization that you control.