Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Donor-Advised Funds
Transcript
- Lucas: So, Luna, I was looking at the latest giving statistics from the National Philanthropic Trust, and donor-advised funds — or DAFs, as everyone calls them — now hold somewhere north of two hundred and fifty billion dollars in assets. Luna: That's a staggering number. I feel like DAFs have become the default answer for wealthy families who want to give but also want the tax break. Lucas: Exactly. And I think the appeal is obvious. You contribute appreciated stock, you get an immediate charitable deduction at fair market value, and you avoid paying capital gains tax on the appreciation. So you're effectively giving more to charity than if you sold the stock, paid the tax, and then donated the cash. Luna: Right. The classic example is someone with a concentrated stock position that's grown a lot. They want to diversify, but selling triggers a huge tax bill. A DAF gives them a way to offload the stock, get the deduction, and potentially even use the DAF to fund their giving for years. Lucas: And that's the key — the so-called 'charitable checking account' concept. You donate in a good year, when your income is high, and you take the deduction in that year. Then you recommend grants from the fund over time, when you know which nonprofits you want to support. The money grows tax-free in the meantime. Luna: So it's not just about the deduction. It's also about timing and flexibility. Lucas: Precisely. Let's put some numbers on it. Say you have a million dollars in stock that you bought for a hundred thousand. If you sell, you owe long-term capital gains tax on nine hundred thousand. Twenty percent federal rate, plus the net investment income tax, plus possibly state tax. You might be looking at a tax bill of two hundred fifty thousand or more. Luna: Ouch. That leaves you with, what, seven hundred fifty thousand to donate, if you're giving it all away. Lucas: But if you contribute the stock directly to a DAF, you get the full million-dollar deduction, and you avoid the capital gains tax altogether. The charity eventually receives the full million, assuming the fund doesn't grow — which it likely will. So you've effectively increased your giving by more than thirty percent. Luna: That's a powerful illustration. And I think a lot of listeners might be surprised to learn that you can contribute not just stock but also private business interests, real estate, even cryptocurrency to a DAF. Lucas: Yes, though those non-cash assets come with more complexity. The DAF sponsor has to value the asset, and for real estate, you typically need an independent appraisal. For private company stock, the sponsor might require a letter from the company's counsel. It's doable, but you need to plan ahead. Luna: So what's the minimum you need to open a DAF? I know some sponsors have fairly low thresholds, but for a wealthy family, they might want a more sophisticated platform. Lucas: Most national sponsors like Fidelity Charitable, Schwab Charitable, or Vanguard Charitable have a minimum initial contribution of around twenty-five thousand dollars. But if you're working with a wealth management firm or a community foundation, the minimums can be higher — sometimes fifty thousand or more. And if you're setting up a DAF as part of a larger estate plan, you might be looking at a million or more. Luna: And the fees? I've seen some sponsors charge an administrative fee plus investment fees, but it varies. Lucas: Typically you'll see an administrative fee of about one percent of assets per year, or sometimes a flat fee if your balance is large. The investment fees depend on the funds you choose. But compared to a private foundation, DAFs are much cheaper to run. No separate tax returns, no legal filings, no minimum distribution requirement. Luna: That's a big advantage. A private foundation has to distribute at least five percent of its assets annually, and you have to deal with excise taxes and all that paperwork. A DAF is just a custodial account. Lucas: And that's actually one of the criticisms. DAFs have no required minimum distribution. Money can sit in a DAF for years, or even decades, without ever making it to a charity. Critics argue that wealthy donors are parking assets to get the deduction, while the actual charitable payout lags. Luna: I've seen that statistic that DAFs pay out around twenty percent of their assets annually, which some say is too low. But does the data support that? I mean, most donors are giving regularly. Lucas: It's true that the average payout rate is around twenty percent, but that number includes a lot of funds that were recently established and haven't had time to distribute. When you look at older DAFs, the payout rates are higher — often thirty percent or more. And there's no penalty for holding funds, which is why some in Congress have proposed forcing DAFs to distribute a minimum percentage each year. Luna: So it's a bit of a controversy. Some people call DAFs 'lazy philanthropy.' But others say they're just a smart way to time your giving. Lucas: Right. And I think the key is that DAFs serve different purposes for different families. For someone who's sold a business and wants to set aside a chunk of the proceeds for charity over the long term, a DAF is a perfect vehicle. They can contribute a large amount in the year of the sale, take the full deduction, and then grant out over time as they see fit. Luna: And that's also a great strategy for a high-income year, like after an IPO or a bonus. You can bunch several years' worth of charitable giving into one year and itemize deductions when they're most valuable. Lucas: Exactly. And that's something our listeners, who are managing wealth, should really think about. The ability to contribute illiquid assets like real estate or private equity to a DAF can be a game changer, because you're avoiding capital gains on the disposition and getting a deduction at fair market value. Luna: But I imagine there are limits. The IRS limits charitable deductions to thirty percent of adjusted gross income for appreciated assets, or sixty percent for cash. So you can't just dump everything into a DAF in one year and deduct it all. Lucas: True. But the excess can carry over for up to five years. So if you have a huge year, you can still take advantage over time. For a family that's just sold a business for fifty million, they could contribute, say, ten million to a DAF and carry the deduction forward. Luna: Let's talk about a real-world example. I remember reading about a founder who contributed a large block of appreciated stock to a DAF right before a liquidity event. The deduction offset a huge chunk of their income, and they avoided the capital gains tax on that stock. They then used the DAF to fund scholarships at their alma mater over several years. Lucas: That's a classic play. And it's a way to involve the next generation too. You can name your children or grandchildren as 'successor advisors' to the DAF. They take over recommending grants after you're gone, which is a way to preserve the family's philanthropic values. Luna: So a DAF can really be a tool for legacy planning, not just tax savings. And I think that's something our audience cares about deeply. Lucas: Absolutely. And if you're setting up a DAF, you have options. You can go with a national sponsor, a community foundation, or even a single-family DAF that gives you more control over investments and grant-making. The trade-off is cost and complexity. Luna: What about the new rules that came into effect recently? I remember there was some talk about the SEC and the IRS changing how DAFs are regulated. Lucas: There have been some updates — mainly around reporting and disclosure. The IRS now requires sponsors to report contributions and distributions in more detail. And there's been discussion about imposing an excise tax on DAFs that don't distribute a minimum amount. But as of August 2026, nothing has been enacted yet. Luna: So it's still a waiting game. But for families considering a DAF, the current environment is still very favorable. Lucas: Yeah. And I'd say, if you're thinking about contributing appreciated stock, the sooner you do it, the better, because you lock in the deduction at today's values and you get the tax benefits in the current year. Luna: One thing I want to clarify for our listeners: you can't take a deduction for the money you contribute to a DAF and then later grant it to a charity and take another deduction. It's a one-time deal. Lucas: Right. The deduction happens at the time of the contribution to the DAF. The grants themselves are not deductible again. So you want to plan carefully around your income and deduction situation. Luna: And let's not forget the investment piece. Once the money is in the DAF, you can invest it in a range of funds, and the growth is tax-free. That means more money for charity over time. Lucas: Exactly. And that's where the 'checking account' analogy breaks down a bit, because you're actually investing the money to grow, not just holding it in cash. You can choose conservative strategies if you plan to grant soon, or more aggressive strategies if you're thinking long-term. Luna: It's really a flexible vehicle. I've also seen families use DAFs to donate anonymously. If you don't want the charity to know who gave, you can request that the DAF sponsor makes the grant without your name attached. Lucas: That's a great point. Some donors prefer to stay anonymous to avoid being solicited by other charities. Or they want to keep their giving private. A DAF gives you that option. Luna: So, what's the one thing you want our listeners to take away from this episode? Lucas: I think it's that a donor-advised fund is not just a tax strategy. It's a way to be more intentional about your giving, to involve your family, and to create a lasting philanthropic legacy. And the tax benefits are just icing on the cake. Luna: If today's conversation helped you think about your giving in a new way, or just gave you a clearer picture of how DAFs work, that's what we're here for. And if you find value in these episodes, the way we keep them ad-free is through listener support. You can buy us a coffee at buy me a coffee dot com slash fexingo. It genuinely helps us keep doing what we do. Lucas: And we appreciate every bit of it. But back to DAFs — one thing I didn't mention is that you can also contribute to a DAF from your IRA if you're over seventy and a half, using the qualified charitable distribution. That counts toward your required minimum distribution, but you don't get a separate deduction. It's a different angle. Luna: Good point. That's especially useful for retirees who don't itemize deductions. It's a way to reduce your taxable income without having to itemize. Lucas: Right. And if you're charitably inclined and you have a high net worth, a DAF is one of the most efficient vehicles out there. Whether you're doing it for the tax benefits, the flexibility, or the family legacy, it's worth a conversation with your advisor. Luna: And as always, make sure you work with a qualified tax professional to ensure you're maximizing the benefits and avoiding any pitfalls. Lucas: Absolutely. So, to wrap up, if you've been thinking about charitable giving, a donor-advised fund might be the right move. It's not a decision to take lightly, but the advantages are clear. Thanks for listening, and we'll see you next time.