Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Donor-Advised Funds for Tax-Efficient Giving
Transcript
- Lucas: So Luna, I want to talk about something that's quietly become the dominant vehicle for charitable giving among ultra-wealthy families — and in 2026, with the tax landscape we have, it's even more powerful. Luna: You're talking about donor-advised funds, right? I've seen the numbers — they've been growing like crazy. Lucas: Exactly. According to the most recent data from the National Philanthropic Trust, assets in donor-advised funds — or DAFs — crossed $200 billion in 2025. That's more than double where they were a decade ago. And the key reason is how tax-efficient they are. Luna: That's a huge jump. I think a lot of listeners hear 'donor-advised fund' and assume it's just a fancy checking account for charity. But it's way more than that. Lucas: Right, and before we go deeper — if our money conversations have helped you think about a decision differently, we'd love to have you as a supporter. It's what keeps this show ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. And now back to the mechanics. Luna: Yeah, I mean, we do this because we genuinely find these strategies fascinating. So let's talk about the core tax move. Lucas: So the real magic is this: you can contribute appreciated assets — say, a stock you bought years ago that's now worth ten times what you paid — directly into a DAF. You get an immediate tax deduction for the full fair market value, and you never pay capital gains tax on the appreciation. Luna: That's the part that still surprises me. You can avoid the capital gains tax entirely, as long as you've held the asset for more than a year. Lucas: Correct. And the deduction is limited to 30% of your adjusted gross income for appreciated property donated to a public charity — but with DAFs, because they're considered public charities, that limit applies. Any excess can be carried forward for up to five years. Luna: So let's put some numbers around this. Say someone is in the top federal bracket — 37% — and they donate $500,000 worth of appreciated stock. How much do they actually save? Lucas: If they itemize, that $500,000 deduction saves them $185,000 in federal income tax. Plus, if they would have sold the stock and paid 20% long-term capital gains — say the cost basis was $100,000 — they avoid a $80,000 tax bill. So combined, that's $265,000 in tax savings on a $500,000 gift. Luna: And the charity still gets the full $500,000. That's a massive win-win. Lucas: Exactly. And that's just the upfront benefit. The other advantage is what's called 'bunching.' Since the standard deduction is high — in 2026, it's around $30,000 for couples — many wealthy families bunch multiple years of giving into one year to itemize, then take the standard deduction in other years. Luna: So you contribute, say, five years' worth of charitable giving into a DAF in one year, claim the big deduction, and then recommend grants from the DAF over the next five years. It's a way to optimize the timing. Lucas: Precisely. And the DAF itself can grow tax-free in the meantime. You can invest the donated assets in a variety of strategies — conservative bonds, growth equities, even alternative assets — and all the growth is tax-sheltered. Luna: Wait — alternatives in a DAF? I thought DAFs were pretty restricted in what you can invest in. Lucas: Most mainstream DAF sponsors — like Fidelity Charitable, Schwab Charitable, or Vanguard Charitable — offer a menu of investment pools. They're usually diversified portfolios, not direct alternatives. But some boutique DAFs, especially those run by family offices, allow more flexibility, including private equity or real estate. Luna: So if you have enough assets, you can effectively run your own little foundation through a DAF, without the administrative costs of a private foundation. Lucas: That's exactly why DAFs have exploded. A private foundation requires annual filings, excise taxes on investment income, and a minimum 5% payout. DAFs have no excise tax, and the payout requirement is less rigid — though the SECURE 2.0 Act has tightened things a bit. Luna: What did SECURE 2.0 change? I know it mostly affected retirement accounts, but I recall there was a DAF provision. Lucas: It expanded qualified charitable distributions from IRAs — QCDs — to allow a one-time rollover of up to $50,000 to a split-interest entity like a charitable remainder trust or a DAF. Previously, QCDs could only go directly to operating charities. Now, wealthy individuals over 70.5 can move IRA assets into a DAF without triggering income. Luna: That's significant because IRA assets are often the most tax-inefficient to pass on — they're subject to income tax for heirs. So using a QCD to fund a DAF is a way to satisfy required minimum distributions and get a charitable deduction without itemizing. Lucas: Right. And it's especially useful for those who don't itemize. The QCD reduces AGI, which can help with Medicare premiums and other phase-outs. Luna: Let's talk about estate planning. Can you name a DAF as a beneficiary of an IRA or life insurance policy? Lucas: You can. Many DAF sponsors allow you to designate them as a beneficiary. The proceeds go into your existing DAF, and then your family can recommend grants according to your wishes. It's a way to create a philanthropic legacy without setting up a separate trust. Luna: But there's a catch, right? The DAF belongs to the sponsor charity, not to you. So you can't control it from the grave — but you can leave nonbinding recommendations. Lucas: That's right. And some families prefer the control of a private foundation for that reason. But for many, the tax efficiency and simplicity of a DAF outweigh the lack of absolute control. Luna: Are there any downsides we haven't covered? I've heard criticism that DAFs allow money to sit idle for years. Lucas: There's some truth to that. DAFs don't have a mandatory payout requirement like private foundations. The IRS has proposed regulations to address 'inactive' DAFs, but nothing is final yet. In practice, most major sponsors encourage or require a minimum distribution, like $100 per year or 5% of assets. Luna: So if you want to be a responsible donor, you should move the money out within a reasonable timeframe. Lucas: Exactly. And many wealthy families use DAFs as a tool for 'giving while living' — they enjoy seeing the impact of their grants. It's not just a tax dodge. Luna: Let's talk about the types of assets you can contribute. We mentioned publicly traded stock. What about private business interests? Lucas: Some DAF sponsors accept complex assets like closely held stock, real estate, or even cryptocurrency. But the process is more involved. You need a qualified appraisal, and the sponsor has to accept the asset. Not all do. Fidelity and Schwab have specific teams for that. Luna: And the deduction for real estate is at fair market value, but it's limited to 30% of AGI for appreciated property, same as stock. Lucas: Correct. And if the property has debt attached, that can create complications — you could trigger a taxable gain. So it's important to work with a tax advisor. Luna: One thing I've seen is families using DAFs as a way to teach the next generation about philanthropy. They give their kids 'grant recommendation privileges' — basically a mini daf within the DAF. Lucas: That's a great point. Many sponsors allow you to set up sub-accounts or name successor advisors. So a parent can involve their children in grant decisions, and eventually pass the advisory role to them. It's a fantastic governance tool. Luna: So if you have a family office, you can centralize all charitable giving through a DAF and still let each family member have their own giving budget. Lucas: Exactly. And the recordkeeping is much simpler than a private foundation. You get one tax receipt at the end of the year, and the sponsor handles all the compliance. Luna: And for the ultra-wealthy, the ability to donate large blocks of appreciated stock without triggering a market impact — you can transfer the shares directly, rather than selling and buying. Lucas: That's a subtle but real benefit. If you're donating a large position in a thinly traded stock, selling it yourself could move the price. With a DAF, the sponsor typically sells the shares over time or distributes them to charities. Luna: I think one of the most compelling uses is for founders who have a huge concentration in their company's stock. They can donate shares to a DAF, diversify their portfolio tax-free, and support causes they care about. Lucas: Right. And with the current market — we're in June 2026, and we've seen significant volatility — locking in gains through a DAF donation can be a smart year-end move. You donate shares when they're high, but you don't have to time the market. Luna: So if you're sitting on appreciated assets and you have charitable intent, a DAF is probably the most efficient vehicle. But it's not for everyone — if you only give $1,000 a year, it's overkill. Lucas: Absolutely. For smaller donors, direct giving or a QCD makes more sense. But for high-net-worth families who want to maximize impact and minimize taxes, DAFs are hard to beat. Luna: I'm curious — are we seeing any legislative changes on the horizon that could affect DAFs? There's been talk about requiring a payout. Lucas: The Biden administration proposed a rule requiring DAFs to distribute funds within 15 years, but it hasn't been enacted. With the current Congress, I don't see it passing soon. But it's something to watch. Luna: Well, for now, DAFs remain one of the most powerful tools in the philanthropic toolkit. Thanks for walking through it, Lucas. Lucas: Always a pleasure. And listeners, if you found this useful, consider supporting the show at buy me a coffee dot com slash fexingo. Until next time.