Super wealthy Americans are using this 1 type of ‘charity fund’ to get massive tax breaks — without even doing any charitable giving. Here’s how the ultra rich are beating the system

DAFs offer donors a world of tax benefits. But those benefits may be coming at the expense of American taxpayers on a whole.

The appeal of DAFs

A DAF is a fund that’s set up to support charitable organizations. DAFs can be funded with cash, stocks, or other assets of value.

DAFs are similar to foundations in that they are funded for the express purpose of charitable giving. Donors to DAFs are able to dictate which organizations become the recipients of those funds.

The benefit of funding a DAF is that donors get an immediate tax break on the money that goes in. But that money doesn’t have to all be disbursed right away. Rather, with a DAF, funds can be allocated to different organizations over time.

A big drawback of DAFs is that there can be hefty administration fees. The Fidelity Charitable Giving Account, for example, has a fee structure that charges the greater of 0.60% or $100 for up to $500,000 in assets, with additional fees for higher balances. A $500,000 balance would incur a $3,000 fee.

Also, DAFs don’t always do a great job of disclosing all of their fees. Those fees benefit the financial institutions that house these funds, and they take away from the amount that ends up going to charitable organizations.

It’s also worth noting that DAF contributions are irrevocable. By contrast, a revocable living trust (a fairly popular estate-planning tool among the wealthy and non-wealthy alike) allows individuals to retain control over their assets during their lifetime.

The big problem with DAFs

DAFs, in theory, are a good thing — they’re funds designed to benefit charities over time. But there are problems with DAFs that policymakers may need to address.

Although DAFs are similar to foundations, they have different requirements. Foundations have to disburse at least 5% of their assets each year. DAFs do not.

Also, DAFs offer donors a tax break beyond a typical charitable donation. That’s because DAFs allow donors to avoid capital gains taxes on assets that appreciate in value from when they’re acquired.

Say you bought stocks for $10,000 and their value rises to $20,000. You could liquidate that position for cash, donate $20,000, and get a $20,000 tax deduction. But you’d also be liable for $10,000 in capital gains taxes.