Can Zakat Be Paid Through a Donor-Advised Fund?

Answered by Shaykh Muhammad Carr

Question

Can transferring stock to a Donor-Advised Fund (DAF), which sells the stock and issues a check to a Zakat-eligible organization, be used to fulfill my Zakat obligations?

Also, when should I make the niyya (intention) for Zakat?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

May Allah reward you abundantly for your commitment to fulfilling this sacred obligation. Zakat is one of the fundamental pillars of Islam, emphasizing both spiritual growth and social responsibility. Allah says,

“Accept charity offerings from their wealth cleansing and making them grow, thereby to full purity in faith and deed.” [Quran, 9:103]

Using the DAF platform to pay your zakat involves several variables. If these variables satisfy the conditions of zakat, then your zakat is discharged; otherwise, it is not.

In the case at hand, you have to ignore the legal construct of the DAF assuming ownership of the stocks/donation, and consider them as your agent. Zakat on stocks cannot be paid in stock form, but in monetary value. [See: Khatib, Mughni]

Therefore, they sell the stocks on your behalf and grant the amount to a valid recipient of Zakat of your choosing.

The potential for the DAF to refuse to pay a grant is not considered contractually risky. Refusal to pay a grant will only come into effect if the philanthropic host or sponsor organisations’ standards and guidelines are violated, or the grant serves direct donor interest. These are known upfront.

Intention (Niyya)

Niyya is defined as the intention that is present at the moment an action begins. Its place is the heart, making it more a matter of inner awareness than verbal articulation. However, verbalizing the intention supports this inner awareness and is therefore recommended. Thus, the intention naturally occurs when you instruct the DAF to grant the charity of your choice.

What Is a Donor-Advised Fund (DAF)?

A DAF is a charity holding entity that holds the money until you decide what to do.

A donor-advised fund can function as a large version of a “Sadaqa Jar” that parents keep at home to teach their children about giving.  It’s money earmarked for charity, but it’s not charity until someone picks up the jar and takes it to a charity.  The difference here is that the person giving in charity has already notified the IRS and obtained tax benefits for giving in charity without necessarily parting with the money. [islamicinheritance.com]

A donor-advised fund (DAF) is a third-party entity set up to manage the charitable donations of individuals, families, and/or organizations. The donor gives the money to the fund rather than giving it directly to a charity. The money is subsequently distributed to charity by the DAF. [Investopedia]

What Is the Prime Advantage of a DAF?

Contributing to a DAF allows the donor to take an immediate tax deduction without deciding what charity will receive the benefits. The funds remain in the DAF until the donor decides how they want them used, which can be months or even years. [Investopedia]

In my view, legally avoiding tax in a way that benefits a charity of your choice is highly recommended, at the very least.

Why a DAF May Refuse a Grant

Reasons why a DAF may refuse to pay a grant are known upfront in the host organisation’s standards and guidelines.  A donor-advised fund (DAF) may refuse to pay a grant if the requested grant does not meet the organization’s standards or guidelines, if the grant would provide a personal benefit to the donor, or if the recipient is not a qualified charity. Specifically, DAFs cannot be used to fulfill personal pledges that result in more than incidental benefit to the donor, or to pay for things like event tickets, galas, or membership fees, unless the full cost is tax-deductible.

It is essential to consult both a qualified local scholar and a tax professional to ensure that your philanthropic giving yields the greatest possible religious and financial benefit.

I pray this is of benefit and that Allah guides us all.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefited from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.