Have you ever wondered how the rich use charities to avoid taxes?

The tax law incentivizes charitable giving. The government provides massive tax benefits to individuals who give to charitable organizations.

Not only does the rich take advantage of these incentives, but they carefully structure how they give.

Vehicles like nonprofits, private foundations, donor-advised funds, and charitable trusts are used to maximize their tax benefits.

Fortunately, these tactics are not only for the rich – any taxpayer can take advantage of them.

In this article, we will guide you through how the wealthy legally tap into sophisticated charitable vehicles to minimize taxes in ways you can also use.

Strategy #1: Donate Appreciated Property to Charity

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Instead of writing a check to your favorite charity, you may consider donating any property or assets you own that have appreciated in value.

This approach increases the value of your donations while also increasing the tax benefits you receive.

Tax Benefits of Donating Appreciated Property 

Donating appreciated property is one of the most tax-efficient ways to give, and it can help you decrease your tax bill while supporting causes you care about.

Let’s jump into why this is a top strategy for the ultra-rich. 

Maximize your tax deductions

Donating property like stocks, real estate, or art that has appreciated in value allows you to deduct the full market value at the time of donation.

This amount can be substantially higher than what you originally paid.

Avoid capital gains tax

If you sell appreciated property, you will have to pay capital gains tax on the increase in value. However, if you donate the property directly, you can avoid this tax.

However, if you donate the property directly, you can avoid this tax.

Impact and efficiency

This method enables you to make a more substantial contribution to your chosen charity.

The higher donation value can significantly benefit the charitable organization and its initiatives, making your contribution go further.

How Does It Work?

Imagine you’ve invested $5,000 in stocks. 

Over time, those stocks perform exceptionally well and their market value rises to $100,000. 

By donating these stocks to a charity, you leverage their current higher market value for a greater cause, rather than the initial amount you paid.

The key benefit is if you donate these appreciated stocks directly to a charity, you can claim a tax deduction based on their current market value—which, in our example, is $100,000.

This is significantly more beneficial than a deduction based on the original purchase price of $5,000.

To effectively implement this strategy, it’s crucial to work with a knowledgeable CPA or financial advisor. 

They can guide you through the specifics, ensuring your donation complies with tax laws while optimizing your tax benefits.

Remember that this strategy can be applied to various assets, not just stocks, broadening your opportunities for impactful giving.

Strategy #2: Set up a Charity Remainder Trust (CRT)

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One strategy the wealthy employ to legally avoid paying taxes is to set up a Charity Remainder Trust (CRT). 

This specialized trust allows individuals to transfer highly appreciated assets like stocks, businesses, or real estate into the trust. 

By doing so, they can avoid paying substantial capital gains taxes that would normally be due upon selling those assets outside of the trust.

Tax Benefits of a CRT

When cutting your tax bill, few tools offer the kind of multi-layered benefits a CRT provides.

Here’s a breakdown of the key tax advantages that make CRTs appeal to the wealthy.

Capital gains tax avoidance

One massive advantage of a CRT is capital gains tax avoidance. 

If you sell an appreciated asset, such as a rental property, you may owe over 15% in capital gains, but a CRT can eliminate those taxes. 

Once the rental property is donated to a CRT, the trust can sell it without triggering capital gains taxes. 

In this case, you can reinvest 100% of the proceeds into other income-generating assets, including stocks and bonds.

Income tax deduction 

When you fund a CRT, you instantly receive a charitable tax deduction. 

This deduction is based on the present value of what the charity is expected to receive in the future. 

As a donor, you can reduce your tax bill this year while still receiving income from the trust for years to come.

Reduce or eliminate estate taxes

Transferring assets to a CRT removes those assets from your estate, which can significantly reduce your estate liability upon your death. 

This is why wealthy families may include CRTs in their wealth planning strategies.

Ongoing income 

You (or beneficiaries) receive an income stream from the trust, making it a valuable financial planning tool.

For example, if you transfer $1 million into a CRT with a 5% payout rate, you’ll receive $50,000 annually for life—an income stream that is fixed, recalculated yearly, and irrevocable once set.

CRTs are innovative tax planning tools that allow high-net-worth individuals to avoid capital gains legally, claim significant income tax deductions, and reduce estate taxes while maintaining an income stream.

How a CRT Works

Here is a simple example of how you can use a CRT to minimize your taxes. 

Let’s say an individual wanted to sell a business valued at $1 million, they could face up to $200,000 in capital gains taxes. 

However, by first transferring ownership of that business into a CRT, they could completely avoid the $200,000 tax bill. 

This is because assets held within a CRT are exempt from capital gains taxes and income taxes while inside the trust. 

In addition to this upfront tax savings, the individual setting up the CRT receives an immediate income tax deduction for the present value of the assets that will eventually go to the designated charity when the trust terminates years down the road. 

So they get a nice upfront deduction from their taxable income.

During the lifetime of the CRT, which can be set for a specific term or the remainder of the person’s life, the individual can receive annual distributions of income from the trust’s assets. 

Most importantly, they only pay income taxes on the distributions they receive each year, not the full amount of income the trust generates annually.

No wonder why these trusts are popular among the wealthy as a legal tax mitigation and charitable giving strategy.

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A private foundation or grant-giving charity (strictly gives money to organizations or scholarships to students) is like a charitable bank account – you can contribute funds now and receive an immediate tax deduction while distributing grants over many years.

The main requirement is that you must distribute at least 5% of the foundation’s assets to charities each year.

Tax Benefits of Private Family Foundations

Private foundations provide various tax benefits beyond the initial tax deduction. 

Immediate charitable deduction

When you contribute to your PFF, you can receive an immediate income tax deduction of up to 30% of your Adjusted Gross Income (AGI) for cash donations.

For contributions of appreciated assets, the deduction is up to 20%.

Any unused portion of these deductions can be carried forward for up to five years, maximizing your tax savings.

Minimal tax on foundation income

A significant benefit of a PFF is investing assets within the foundation. Any income generated is subject to low tax rates, ranging from 1% to 2%.

This allows a bigger portion of your investments to be available for charitable giving while optimizing your tax liabilities. 

Write off travel and board meetings

PFFs can also cover travel expenses for board meetings, which may include your family members. Those expenses are also deductible from your required distribution each year.

How a Private Foundation Works

Private foundations make grants to beneficiaries or other charities instead of conducting charitable activities themselves.

Annually, the IRS requires PFFs to distribute at least 5% of their non-charitable-use assets, including investments and endowments.

Eligible expenses for this distribution include grants, salaries (even for family members), and administrative costs.

It’s essential to track these distributions to avoid IRS penalties.

A board of directors manages the foundation, reviewing grant requests and operations.

While exempt from income taxes, PFFs pay a 1.39% excise tax on investment income.

A PFF is a long-term strategy to give to charity, providing control, flexibility, and a way for families to get involved while enjoying tax benefits and supporting causes they care about.

Strategy#4: Set up a Donor-Advised Fund

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A donor-advised fund (DAF) is another charitable giving account that allows you to receive a charitable tax deduction today for contributions to charities at a later date.

It is similar to private foundations, except it is much easier to set up. 

You don’t need to hire a lawyer or set up a new entity to create a donor-advised fund.

Instead, you can go to a financial institution, like Fidelity, open an account, transfer money, and receive an immediate tax deduction for the money you contributed.

Then, you advise the institution on when to distribute those funds to charities of your choice. 

Although you’re getting an immediate tax deduction for your contribution to the fund, you can distribute the money to charities over several years.

Tax Benefits of Donor-Advised Fund

Donor-advised funds offer powerful tax benefits, making them an attractive option for charitable giving.

Here are the top advantages to take note of:

Immediate large tax deduction

When you contribute assets to a donor-advised fund, you can claim a tax deduction in the same year rather than when the funds are disbursed to charities. 

For example, if you donate $4,000 monthly ($48,000 annually), you could now contribute three years’ worth of donations ($144,000) to a DAF. 

This approach allows you to immediately claim a $144,000 tax deduction rather than smaller annual deductions.

Capital gains tax avoidance

Contributing assets like stocks or real estate that have appreciated in value to a DAF allows you to avoid paying capital gains taxes on the appreciation. 

You can typically deduct the current market value of the asset, not just what you originally paid, maximizing your tax deduction.

Reduction in estate taxes

Assets placed in a DAF are removed from your estate for tax purposes, potentially saving on estate taxes if your estate exceeds the thresholds ($13.61 million in 2024 and $13.99 in 2025).

How a Donor-Advised Fund Works

When you contribute to a donor-advised fund, the assets are legally transferred to the sponsoring organization’s control, recognized by the IRS as a 501(c)(3) nonprofit entity.

Although the sponsoring organization has legal control over the donated assets, you retain advisory privileges as a donor.

This means you recommend how to distribute the funds to charities.

As long as the organizations you choose to support are recognized by the IRS as legitimate U.S. charitable organizations, the sponsoring organization will generally follow your recommendations and distribute funds accordingly.

This setup allows you to make a charitable contribution, receive an immediate tax benefit, and recommend grants from the fund over time, providing you with flexibility in how and when your charitable gifts are disbursed.

For example, you donate $100,000 in appreciated stock to a DAF at the end of the year, avoiding capital gains taxes and receiving a full charitable deduction for the current tax year.

Rather than rushing to choose a charity, you recommend $10,000 grants to different nonprofits over the next several years—all while the remaining balance continues to grow tax-free.

Strategy #5: Donate Cash

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Donating appreciated investments usually avoids long-term capital gains taxes.

However, you can only deduct up to 30% of your adjusted gross income (AGI) from donating appreciated investments for that year. 

For most people this is enough, but some years you may want an even larger tax deduction.

In those situations, you can donate cash together with appreciated investments.

The deduction for cash contributions you make to an organization during the year is limited to 60% of your adjusted gross income (AGI).

Strategically combining cash and investment donations allows you to reduce your taxable income even more.

Fidelity Investments customers can use their Appreciated Securities Tool when donating to easily identify the investments in their portfolio that have appreciated the most in value.

Strategy #6: Spread Out Big Donations Over Multiple Years

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If you earned an extremely high income this year, consider that you can carry forward charitable donation deductions for up to five years.

You can claim the maximum deduction possible for 2024 – 60% of your AGI for cash donations and 30% for appreciated investments. 

Be mindful you can carry forward any leftover charitable deductions you couldn’t use and deduct them over the next five years.

You need to use up these carried-forward deductions as much as possible the next year, after deducting new charitable donations for that year.

This allows you to “front-load” larger donations in a high-income year to maximize the tax deductions over multiple years.

If you cannot take advantage of these deductions within the 5 years, setting up a donor-advised fund or private foundation might be a better option.

The key point is that making a large charitable donation in one high-income year allows you to spread tax deductions over six years.

Bottom Line

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Ultimately, whether wealthy donors are motivated primarily by tax savings or a genuine desire to give back, they provide much-needed funding for non-profit organizations tackling important issues.

Remember, you don’t need to be a billionaire to take advantage of these tools.

Whether you’re looking to reduce capital gains, lower your income tax bill, or build a lasting legacy, there are tax planning strategies you can start using today.

Schedule a free consultation with us and learn how to make the best moves with your giving and investments