Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Donor-Advised Funds for Tax and Legacy
Transcript
- Lucas: Let's say you own stock you bought ten years ago for a million dollars. Today it's worth five million. You want to give a million to charity this year. Luna: So if you sell the stock, pay capital gains, then donate the cash — you lose maybe 23.8 percent to taxes before the charity ever sees a dime. Lucas: Exactly. And the ultra-wealthy solution to that friction is a donor-advised fund, or DAF. You contribute the appreciated stock directly to the DAF, deduct the full fair market value — up to 30 percent of AGI — and never pay the capital gains tax. Luna: The charity eventually gets the full five million if you contribute all of it, not four million after taxes. Lucas: Right. And you get to recommend grants from the DAF over time — years, decades, even across generations. The money sits invested, grows tax-free inside the DAF, and you direct grants whenever you want. Luna: It's basically a charitable checking account with a tax break up front. Lucas: That's the common framing. But in practice, the ultra-wealthy use DAFs much more strategically. Let me give you a concrete example. A client funds a DAF with ten million dollars in appreciated stock. They get a roughly 2.4 million dollar tax saving in year one — that's the capital gains they would have paid. Luna: And they don't have to decide which charities get that money until later. They can take years to research, or wait for a disaster, or involve their kids in the giving decisions. Lucas: Exactly. The DAF decouples the tax event from the giving decision. That's the core insight. And the big players — Fidelity Charitable, Schwab Charitable, Vanguard Charitable — they now manage over a hundred and fifty billion in DAF assets combined. Luna: That number has more than doubled in the last five years. I think the pandemic giving surge accelerated it, but the trend was already there. Lucas: Yeah, and a lot of that growth is from high-net-worth families using DAFs not just for giving but as part of their estate plan. You can name the DAF as a beneficiary of your IRA, for example. The IRA distribution goes to the DAF tax-free, and you've satisfied your charitable intent without the income tax hit your heirs would otherwise face. Luna: So it's a way to avoid the 'charitable IRA' limitation — the annual cap of a hundred thousand for qualified charitable distributions — by using a DAF as the receptacle. Lucas: Right. And there's a more aggressive strategy too: bunching deductions. Under the TCJA, the standard deduction is high — about thirty thousand for a married couple in 2026. Many high-earners don't itemize every year because their charitable gifts plus other deductions don't exceed that threshold. Luna: So you bunch five years of giving into one year, fund a DAF, take the itemized deduction that year, and then recommend grants over the next five years. You end up deducting more overall. Lucas: Exactly. I've seen families fund a DAF with three hundred thousand dollars in one year, deduct it all, and then give sixty thousand a year for five years. Without the DAF, they might have donated sixty thousand each year and gotten zero deduction because they took the standard deduction. Luna: That's a real tax saving. But it also means the money is locked in the DAF. You can't change your mind and take it back. Lucas: That's the trade-off. Once you contribute to a DAF, it's an irrevocable gift to the sponsoring organization. You retain advisory privileges, not ownership. And that's why some critics say DAFs are overused — money sits idle, never reaching working charities. Luna: There's a legitimate concern. Studies show that some DAFs sit for years with minimal payout. The average payout rate from DAFs is around 20 percent per year, meaning the average dollar stays in the fund for about five years before being granted. Lucas: Which is why Congress has been looking at DAFs. The SECURE 2.0 Act from 2022 didn't touch them, but the 2025 SECURE Act proposals include a requirement that DAFs distribute at least 5 percent of assets annually, similar to private foundations. Luna: 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. Lucas: And that minimum distribution rule would change the calculus. Right now, families can contribute stock, get the deduction, and let the money grow for years before granting. A 5 percent payout requirement would force grants sooner, reducing the compounding effect. Luna: So are families rushing to fund DAFs now to lock in the current rules? Lucas: Anecdotally, yes. Some wealth advisors I've spoken with say they're seeing a spike in DAF contributions in the first half of 2026, partly because of the potential regulatory change. But also because the market is at all-time highs — contributing appreciated stock now captures a high deduction and avoids selling into a potential peak. Luna: It's a tax-motivated move, but it also serves a real philanthropic goal if the family follows through. Lucas: Right. And that's the key question: Is the tax tail wagging the charitable dog? For some families, yes. They fund a DAF for the deduction and then treat the grants as an afterthought. But for many ultra-wealthy families, the DAF is a tool for intentional, multi-generational giving. Luna: I've seen a family use a DAF to involve their teenage kids in grant-making. They give each child a budget of ten thousand dollars to research and recommend grants. The kids learn about philanthropy and the family's values. Lucas: That's a great use case. And it's hard to do that with a private foundation, which has more compliance costs and annual filing requirements. A DAF at Fidelity or Schwab costs almost nothing to set up and maintain. Luna: So for a family with a net worth between ten and fifty million, a DAF is often more practical than a foundation. Lucas: Absolutely. The minimum to open a DAF is typically five thousand to twenty-five thousand dollars, but the real utility kicks in at higher amounts. And the investment options inside DAFs have improved dramatically. You can have a diversified portfolio of index funds, even some alternative assets. Luna: What about using a DAF for non-cash assets besides stock? Lucas: Good question. You can contribute real estate, private business interests, even cryptocurrency. But the valuation and liquidity issues are more complex. For example, contributing a piece of real estate requires an appraisal, and the DAF sponsor may not accept illiquid assets. Fidelity Charitable has a whole process for evaluating complex assets. Luna: And the deduction for non-cash assets is limited to cost basis unless you've held it for more than a year, right? Lucas: Right. Short-term gains get cost-basis deduction only. So the sweet spot is long-term appreciated assets. That's the classic move. Luna: I want to go back to the bunching strategy. Is that still relevant in 2026 with the TCJA provisions set to expire after 2025? Lucas: Great point. The TCJA individual provisions, including the higher standard deduction and the 30 percent AGI limit for cash gifts, are scheduled to sunset after 2025. If they expire, the standard deduction drops, and itemizing becomes more common again. But that doesn't kill the bunching strategy — it just changes the math. Even with lower standard deductions, bunching can still make sense if you're charitably inclined. Luna: So the DAF is a permanent fixture in the tax-efficient giving toolkit, regardless of what Congress does. Lucas: I think so. The vehicle is too useful. And the biggest growth area I see is in using DAFs for legacy planning. Families are naming DAFs as beneficiaries of retirement accounts, life insurance policies, even as the remainder beneficiary of a charitable remainder trust. Luna: That creates a pipeline: the trust generates income for the family during their lifetime, then the remainder goes to the DAF, which then grants to charities over time. Lucas: Exactly. And the DAF can exist in perpetuity — or at least until the sponsoring organization dissolves. Some families set up a DAF with a multi-generational mandate: the grandchildren can recommend grants, but they can't change the fund's purpose. Luna: It's a way to embed a family's philanthropic identity without the overhead of a foundation. Lucas: And that's really the bottom line. For ultra-wealthy families, a DAF is not just a tax shelter. It's a governance tool for giving. It forces deliberation, it allows for growth, and it keeps the charitable intent alive across generations. Luna: But the tax benefits are real, and they're the entry point for most families. Lucas: Sure. But once they're in, the conversation shifts from 'how much can I deduct' to 'how do we want to make a difference'. And that's when the DAF becomes genuinely powerful. Luna: I think that's a good note to end on. Next episode, we should look at the flip side — private foundations and their advantages over DAFs. Lucas: Perfect setup. We'll compare the two side by side. For now, if you're a high-net-worth listener and you've been thinking about charitable giving, a DAF is probably worth a conversation with your advisor.