Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Donor-Advised Funds for Tax Efficiency
Transcript
- Lucas: So let's say you've got a concentrated stock position — maybe you were an early employee at a company that went public, and you're sitting on $5 million worth of shares with a cost basis of basically zero. You want to be generous, but you also don't want to write a massive check to the IRS. Luna: That's the classic donor-advised fund moment, right? You donate the shares directly, skip the capital gains tax, and get a deduction for the full market value. Lucas: Exactly. Donor-advised funds — or DAFs — have become the workhorse of high-net-worth charitable giving. In 2025, Fidelity Charitable alone received over $10 billion in contributions. More than half of those contributions were non-cash assets — appreciated stock, private equity, even cryptocurrency. Luna: And the appeal is pretty straightforward. You get the tax deduction in the year you contribute, but you don't have to decide which charities to support until later. The money sits in an investment account, grows tax-free, and you recommend grants over time. Lucas: Right. But I think the most powerful use case — and this is where it gets interesting for our listeners — is when you have a lumpy income year. Say you sell a business, or you exercise incentive stock options. Your adjusted gross income spikes. A DAF lets you 'bunch' multiple years of charitable giving into one year, take the deduction at a higher marginal rate, and then distribute the funds over the next decade. Luna: I want to get into a real example. I was talking to a tech executive who funded a DAF with $2 million in Apple shares right before a big run-up. The shares had a cost basis of about $200,000. If he'd sold, he'd owe long-term capital gains on $1.8 million — at 23.8 percent, that's roughly $430,000 in tax. Lucas: Ouch. Luna: Instead, he contributed the shares to a DAF. No capital gains event. He deducted the full $2 million against his income, saving about $740,000 in federal tax at the top bracket. Then he recommended grants totaling $200,000 per year to his favorite charities. The remaining $1.8 million kept growing. Lucas: And that's the double win: you avoid the tax on the gain, you get a deduction for the full value, and the money inside the DAF compounds tax-free. Over 10 years, even at a conservative 6 percent return, that $2 million becomes about $3.6 million available for grants. Luna: But there's a controversy brewing. Critics say DAFs are being used more as tax shelters than charitable vehicles. The data shows that while contributions have skyrocketed, annual payout rates from DAFs have been hovering around 20 percent — meaning a lot of money sits idle. Lucas: Yeah, there's no required minimum distribution from a DAF, unlike a private foundation which must pay out 5 percent of assets each year. That's led to proposals in Congress to mandate a 5 percent payout rate for DAFs. The idea is to prevent wealthy donors from parking assets indefinitely and still claiming deductions. Luna: And the industry pushes back. They argue that DAFs are often used for multi-year giving strategies — a donor might contribute in a high-income year and then recommend grants over a decade. The payout rate is actually higher than 20 percent if you look at individual DAFs over their lifetimes. Lucas: Look, I think the criticism has some merit. There are certainly cases where a DAF is used primarily for tax planning with minimal charitable intent. But for most high-net-worth families, it's a legitimate tool to align giving with income. You don't have to decide every charity on December 31st. Luna: And there are other structural advantages over a private foundation. Lower administrative costs, no separate tax return, no excise tax on net investment income. For families giving less than $5 million a year, a DAF usually makes more sense than a foundation. Lucas: Absolutely. With a private foundation, you're filing a 990-PF every year, you have to comply with self-dealing rules, and the IRS is watching. A DAF is essentially a sub-account within a larger public charity. You recommend, they do the diligence and cut the check. Luna: But one downside — you lose control. Once the assets go into the DAF, they belong to the sponsoring organization. You can't direct them to a foreign charity or to support a political candidate. And you can't get the assets back. It's irrevocable. Lucas: Right. So if you think you might want to change your mind, a DAF is not for you. But if you're committed to giving and you want maximum tax efficiency, it's hard to beat. Especially with appreciated assets that have low basis — like private equity stakes or real estate. Luna: Private equity is actually a growing area. Fidelity Charitable, Schwab Charitable, and the big community foundations now accept private fund interests. You donate the LP interest, get a deduction based on a qualified appraisal, and when the fund distributes proceeds, they go into your DAF. Lucas: That's a sophisticated strategy. You get the deduction before any liquidity event, and the gains within the fund are never taxed — because the DAF is tax-exempt. The full distribution goes to charity eventually. Luna: It's also a way to diversify concentrated holdings without triggering tax. Suppose you have a large position in a single stock that you want to reduce. You can donate shares to a DAF, get the deduction, and the DAF can sell the shares tax-free and reinvest in a diversified portfolio. Lucas: Exactly. The DAF becomes a tax-optimized rebalancing tool. But you need to be careful about the appraisal requirements. For publicly traded stock, it's easy — you use the average of high and low on the date of contribution. For private equity or real estate, you need a qualified appraisal from a third party. Luna: And if you donate assets that are subject to debt — like real estate with a mortgage — that can trigger unrelated business taxable income. So you want to work with a tax advisor. Lucas: Let's talk about the choice of sponsor. There are three main types: commercial sponsors like Fidelity Charitable and Schwab Charitable; community foundations; and single-issue DAFs like those run by universities or hospitals. Luna: Commercial sponsors are the most popular. They offer low minimums — often $5,000 to open — and a wide range of investment options. Fidelity Charitable has over $40 billion in assets. They charge an administrative fee of about 0.6 percent annually, plus fund expenses. Lucas: Community foundations are more local. They focus on a specific geographic area and offer the donor the ability to stay involved in grant-making. The fees are comparable, but the investment options might be more limited. The advantage is that you can create a named fund — like the Smith Family Fund — and your giving stays local. Luna: And single-issue DAFs let you support a specific cause, like a university's scholarship fund. But you're locked into that mission. If you want flexibility, a commercial sponsor or community foundation is better. Lucas: One thing worth noting: the SECURE 2.0 Act in 2022 allowed a one-time rollover of up to $50,000 from a 401 or IRA to a DAF. That's for qualified charitable distributions. But most high-net-worth families are using appreciated assets, not retirement accounts. Luna: And of course, DAFs can be part of an estate plan. You can name a DAF as a beneficiary of your IRA or life insurance policy. The assets pass to the DAF tax-free, and your heirs avoid income tax on retirement accounts. Lucas: Right. So to sum up: DAFs offer incredible flexibility and tax efficiency, but they're not a one-size-fits-all tool. If you're charitably inclined and have a concentrated asset position or a big income year, it's worth exploring. Luna: And the key is to work with a good advisor who can model the tax impact and help you choose the right sponsor and investment strategy. Lucas: Before we wrap up, I want to circle back to something we touched on earlier — the criticism that DAFs can be used to avoid taxes without meaningful charitable activity. There's a bill called the Accelerating Charitable Efforts Act that would impose a 5 percent payout requirement and limit deductions for non-cash assets. If that passes, the landscape changes. Luna: But for now, DAFs remain one of the most powerful tools in the high-net-worth playbook. And if you're using them right, you're not just saving taxes — you're making a real impact. Lucas: If our money conversations have helped you think about a decision differently, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a simple way to support the show and keep it ad-free. We appreciate it. Lucas: So with that, let's get back to the mechanics. One more practical point: if you're considering a DAF for this year, the deadline is December 31st. But for appreciated stock, you need to initiate the transfer several days early to make sure it settles by year-end. Luna: And if you're donating mutual funds, the process can take even longer. So plan ahead. Lucas: Alright — that's donor-advised funds. Next time we'll talk about charitable remainder trusts, which offer a different trade-off: you get an income stream for life, and the remainder goes to charity. Luna: Looking forward to it. Thanks, Lucas. Lucas: Thanks, Luna.