Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Donor-Advised Funds for Charitable Giving
Transcript
- Lucas: Luna, I want to talk about something that's quietly become one of the most popular vehicles in philanthropy — the donor-advised fund. It's essentially a charitable savings account, but for ultra-wealthy families it's a lot more strategic than that. Luna: Yeah, we've covered trusts, insurance, credit lines — but never DAFs. And they are huge. Fidelity Charitable alone held something like fifty billion dollars in assets last year. Lucas: Fifty-three billion as of their 2025 annual report. That's up from about forty-five billion the year before. Growth rate is around eighteen percent year-over-year. And it's not just Fidelity — Schwab Charitable, Vanguard Charitable, Goldman Sachs. Total DAF assets in the US are now over two hundred and thirty billion. Luna: So how does it actually work for a wealthy family? I know the basic idea — you contribute assets, get a tax deduction immediately, then recommend grants over time. But the details matter. Lucas: Right. The fundamental structure: you make an irrevocable contribution to a public charity that sponsors the DAF. That charity takes legal control, but you — the donor — retain advisory privileges on how the funds are invested and which nonprofits receive grants. The tax deduction is available in the year of contribution, up to sixty percent of adjusted gross income for cash donations, thirty percent for appreciated assets. Luna: And that's the big advantage over a private foundation — you get a higher deduction limit. Private foundations cap out at thirty percent for cash, twenty percent for appreciated stock. Lucas: Exactly. Plus, you avoid the administrative burden. No separate tax return, no excise tax on net investment income, no required minimum distribution. But that's also where the criticism comes in — because there's no required payout from a DAF. You can contribute and let the money sit, growing tax-free, for decades. Luna: That's been a big debate. Some people call DAFs 'warehouses of charity' — money that's been deducted but never actually granted. The IRS proposed regulations in 2025 that would require DAFs to distribute within fifteen years. Lucas: Yes, and those rules haven't been finalized yet. But the Treasury Department estimated that about thirty billion dollars is sitting in DAFs that haven't moved in five years or more. So there is pressure. But for the families we talk about on this show, the strategic flexibility is the whole point. Luna: Let's get into a concrete case. Say a family has a very high-income year — maybe they sold a business, exercised options, had a huge bonus. They want to give, but they also want to manage their tax bracket. Lucas: That's the classic 'bunching' strategy. Under the Tax Cuts and Jobs Act, the standard deduction is high — around fifteen thousand for individuals, thirty thousand for couples. So many families don't itemize. But if you have a year where you can bunch multiple years of giving into a single DAF contribution, you itemize that year, get the deduction, then spread the grants out over subsequent years. You effectively get the tax benefit without having to rush the philanthropic decisions. Luna: And the assets inside the DAF grow tax-free, so the charity ultimately gets more. That's appealing. Lucas: It is. But here's where it gets really interesting for ultra-wealthy families — the types of assets they can contribute. Not just cash or publicly traded stock. DAFs can accept private equity interests, real estate, cryptocurrency, even art. Luna: Cryptocurrency — specifically Bitcoin or Ethereum — is actually one of the fastest-growing contribution types. The donor avoids capital gains tax on the appreciation, and the sponsor typically liquidates immediately so the charity gets cash. Lucas: Right. In 2025, Fidelity Charitable reported that crypto donations totaled over one point two billion dollars, up forty percent from the previous year. That's a huge number. And for private equity — you can contribute shares in a fund that's still in its investment period. The DAF sponsor becomes the limited partner. The donor gets a deduction for the fair market value, which can be tricky to appraise. Luna: Appraisal is key. The IRS requires a qualified appraisal for non-publicly traded assets over five thousand dollars. And if you're contributing something like a stake in a family business, you need a proper valuation. If the IRS later challenges it, you could lose the deduction. Lucas: There's also a subtler strategy that some families use — contributing closely held stock to a DAF and then having the DAF participate in a redemption. The company buys back the shares from the DAF, and the proceeds go into the DAF for future grants. The donor gets a deduction for the stock's value, avoids capital gains tax, and the company gets a tax deduction for the redemption premium in some cases. Luna: That's called a 'charitable bailout' — it's been around for decades but it's aggressive. The IRS has issued rulings on it. You have to be careful that the DAF isn't legally obligated to redeem, otherwise the donation might be recharacterized. Lucas: Right, the DAF must have real discretion. But for families working with a good tax lawyer, it's a viable way to unlock liquidity from a concentrated position. Now, there's another angle I want to touch on — the 'giving while living' philosophy versus the 'perpetual DAF' approach. Luna: Some families set up a DAF with the intent of making it a family foundation in perpetuity — they name successor advisors, usually children or grandchildren. The DAF can continue indefinitely, making grants in the family's name. But there's no legal requirement to distribute income, so some DAFs just accumulate. Lucas: And that's where the criticism really lands. A 2024 study from the Institute for Policy Studies found that the largest DAFs — those over ten million dollars — distribute on average only about six percent of their assets per year. That's lower than the typical private foundation's five percent minimum. So effectively, the tax deduction was taken but the charitable dollars are being deployed slowly. Luna: The proposed IRS rules from 2025 try to address that by requiring a fifteen-year payout period for all contributions made after the rule's effective date. But there's pushback from the financial services industry — they argue that DAFs encourage more giving overall because they make it easy. Lucas: And to be fair, Fidelity Charitable data does show that donors who use DAFs give more over time than those who don't. But causality is hard to prove. Maybe the kind of people who open DAFs are already generous. Luna: That's a good point. And I think for our listeners — many of whom are building wealth — the DAF is worth understanding even if you're not ultra-wealthy. Community foundations offer DAFs with much lower minimums. You can start with five thousand dollars. Lucas: That's a great point. And speaking of our listeners — if this conversation has helped you think about your own giving strategy, we want to mention that listener support is how this show stays ad-free. If you've gotten value from our episodes, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep these conversations going, and we really appreciate it. Luna: Yeah, it's a small gesture that makes a big difference for us. And we're grateful for everyone who chips in. Lucas: Alright, back to DAFs. One more strategic use case I want to highlight — using a DAF for international giving. If you want to support a charity overseas, it can be complicated to get a US tax deduction directly. But if you contribute to a DAF and recommend a grant to a us based intermediary that works internationally, you still get the deduction. Luna: That's a workaround a lot of families use. They set up a DAF, then recommend grants to organizations like GiveWell or the Global Fund, which then allocate the money abroad. The IRS doesn't allow deductions for direct gifts to foreign charities unless they have a US affiliate. Lucas: Exactly. And the DAF sponsor handles all the due diligence — they check that the receiving organization is a qualified 501. That's a huge administrative load off the donor. Luna: Let's talk about the investment side. Inside a DAF, the assets can be invested in a range of options — conservative bond portfolios, growth stock funds, even alternative investments in some cases. The growth is tax-free, so the longer you wait to grant, the more you potentially have to give. But that also creates the incentive to delay. Lucas: Right, and some sponsors offer impact investing options — you can invest in ESG funds or community development finance institutions. So the DAF holdings themselves can align with the donor's values before the money even goes out the door. Luna: I think that's a feature that private foundations can't easily replicate — because foundations have to distribute five percent of assets annually, so they can't let the corpus grow indefinitely. DAFs can, and that's why some families prefer them. Lucas: Though the pending regulations could change that. If the fifteen-year payout rule goes through, the advantage diminishes. But even then, DAFs still offer simplicity and anonymity — you can make grants without revealing your identity, which some donors value. Luna: Anonymity is a big deal for families who get a lot of donation requests. They can give through the DAF and the charity just sees the sponsor's name. Lucas: So to wrap it up: DAFs are a powerful tool for tax-efficient charitable giving, especially for families with appreciated assets or variable income. They're not perfect — the payout debate is real — but for the right situation, they can be a centerpiece of a philanthropic strategy. Luna: I'd add that anyone considering a DAF should talk to an advisor about the bunched deduction strategy, and about what assets make sense to contribute. And keep an eye on those IRS regulations. Lucas: Good advice. Thanks for the conversation, Luna. Luna: Thanks, Lucas. See you next time.