Donor-advised funds (DAFs) surged in popularity in recent years and now are among the most popular ways to make charitable gifts.

DAFs offer significant advantages, but many people are unaware of some potential traps and are setting themselves up for disappointment.

A DAF is a charitable entity set up by a sponsoring organization. The largest DAFs are set up by private financial services companies, such as Charles Schwab & Co., Fidelity, and Vanguard. Though created by the firms, the DAFs are independent 501(c)(3) public charities and are separate legal entities. Other DAFs are set up by local or regional charities, often known as community foundations.

An individual sets up an account at a DAF and contributes money or property. Most DAFs now accept many types of property, including digital currencies, interests in privately-held businesses, real estate, and collectibles.

The individual qualifies for a charitable contribution deduction as of the day money or property is transferred to the DAF. But the DAF doesn’t have to make gifts to individual charities right away. Those gifts can be made over time.

The DAF will invest the money or property it holds, and investment returns will increase the value of the donor’s account. That gives the donor more money to contribute over time.

Many DAFs, especially those sponsored by national financial services firms, allow the donor to recommend how the account is invested from among options offered by the sponsor. Others provide limited options or invest all contributions collectively.

In addition, the donor recommends the contributions to be made from the account, showering the money on charities the donor favors and on the donor’s preferred schedule.

DAFs have significant advantages but also have some potential downsides that don’t receive enough attention.

Some DAFs have an annual limit on either the dollar amount or the percentage of the account that can be contributed to one charity. Some have both limits.

A DAF might limit the number of charities an individual can contribute to during a year. Other DAFs permit donations to an unlimited number of 501(c)(3) charitable organization.

Determine if a DAF has such limits and enforces them.

Another downside is that donations to a DAF are irrevocable and become the property of the DAF. That can have two important consequences.

Once property is donated, the DAF decides what to do with it. There have been a few court cases in which donors contributed property to a DAF with instructions or preferences about how and when the property should be sold. The timing or manner of the sale would affect the value of the stock or the donor’s tax deduction.

But the DAFs sold the property when it was convenient for them. The courts ruled that, even if the DAF promised it wouldn’t sell the property without the donor’s consent, the DAF can do whatever it wants with property once the contribution is complete. The donor has no rights in the property.

Likewise, the donor only recommends charitable contributions for the DAF to make. The final decision is the DAF’s.

I’m not aware of a DAF rejecting the recommendation of a donor, except when the recommended donee was not a 501(c)(3) charitable organization. But the DAF does have the right to reject a donor’s recommendation, because the DAF controls the assets.

A more significant issue is what happens to the account after the donor passes away or becomes incapacitated.

This issue is becoming more important as people use DAFs as substitutes for private foundations or trusts and contribute to DAFs with the idea that the donations will be made over more than one generation. Some estate or financial planners now advise people to include significant donations to DAFs in their wills instead of to individual charities or a private foundation.

Significant light is shed on this issue in a recent study by attorneys Cassandra S. Nelson and Barry A. Nelson reported in Steve Leimberg’s Charitable Planning Newsletter. The study found several key differences and gaps in DAF succession policies.

In general, DAFs set the policies for the extent to which successors can manage the account and recommend contributions are the donor passes away or loses cognitive capacity. Some don’t allow for successors, while others do but with limits.

Some DAFs will agree to modify their standard donor agreements so a donor can determine how succeeding generations recommend donations after the original donor dies or becomes incapacitated. But some of those DAFs allow successor decisionmakers for only one generation while others allow at least two generations of successors.

Among DAFs that allow children or other successors to take over making recommendations, some allow the agreement to be modified so that when there are multiple children, recommendations can be made only by a majority or unanimous agreement of the children, whichever the donor prefers. But others will follow recommendations from any of the children named by the donor without seeking the consent of or even giving notice to the other children.

When a successor is allowed, some DAFs will review requests from the successor for consistency with the original donor’s grants and donations or with guidelines the original donor established. But other DAFs will follow whatever recommendations a successor makes.

Another issue is what happens when the donor didn’t designate a successor or the designated successors have passed away or lost cognitive capacity.

Most DAFs say at that point the account will be terminated and distributed to charities. Some of those DAFs will distribute the money to charities that previously were recommended by the donor or the successors. Other DAFs say they have no obligation to give preference to those charities.

In light of these findings, it’s important for donors to consider the estate planning for DAFs. They need to learn what will happen to the account after they pass away or become incapacitated.

Determine if a DAF allows modifications to its standard agreement that are in line with your interests and desires for the account. Also, see if there are restrictions on the ability to move the account to a different DAF if the current DAF changes its policies or isn’t managed the way you expected. The authors of the study said community foundation DAFs tend to be more flexible on these issues than other DAFs.

An alternative strategy is to first create a trust. You transfer money to the trust now or through your will, and the trust makes the DAF contributions. Then, whoever is the trustee has the power to direct the charitable contributions. The future contributions are controlled through the trustee succession process and the trust agreement’s rules for how donations are determined. The DAFs policies don’t really matter, because the trust will last as long as there is money in the DAF account.

But, while solving succession problems, the trust approach would incur some costs and defeat some of the advantages of using a DAF instead of a private foundation,

Before opening a DAF account, discuss this option with the DAF.