Help Your Kids Create a Charitable Legacy

Donor advised funds (DAFs) have become one of the more popular charitable giving tools over the past decade. They’re flexible, relatively simple to set up, and offer real tax advantages. A lot of younger families are interested in them.

Here’s the challenge. Setting up a DAF requires funding it with something, either cash or securities. And a lot of people in their 20s or 30s who want to start one don’t have a lot of either sitting around. They may be in a good income position, but their money is tied up in retirement accounts, home equity, or just the costs of living.

Their parents, on the other hand, often have a very different situation.

The Key Ingredient: Big Unrealized Gains

If you’ve held equities since 2009, there’s a good chance some of your positions have grown significantly. The market has had a long run, with the S&P 500 Index experiencing a total return of almost 950% from 1/1/2009 to 12/31/2025.¹ A stock or equity fund you bought at $10,000 might be worth over $100,000 today. On paper, that’s a great outcome. In practice, it creates a challenge.

Selling means recognizing a capital gain. Federal long-term capital gains rates run up to 20%, and if your income is high enough, you may also owe the 3.8% net investment income tax. On top of that, state capital gains taxes could apply, depending on where you live. On a position with a large embedded gain, that’s a major tax bill.

So a lot of people just hold onto the position. That’s not always the wrong move. But it’s also not the only option.

Contributing Directly to Your Kid’s DAF

If your child has set up a donor advised fund (or wishes to), you may be able to contribute appreciated securities directly to it. You don’t have to sell the funds first and give cash. Instead, you transfer the shares directly to the DAF.

When you do that, a few things happen at once.

1. You may be able to claim a charitable deduction for the fair market value of the securities on the date of the contribution, not your original cost. So if you paid $10,000 for shares now worth $100,000, the value of the charitable gift is $100,000.

2. You avoid the capital gains tax you would have owed if you’d sold the position yourself. The DAF, as a tax-exempt entity, can sell the shares without paying capital gains tax. The full value stays in the fund.

3. Your child now has a funded DAF they can use to grant to the charities they care about, and they can contribute to it as their own financial situation and goals evolve.

One thing to be clear about: the charitable deduction goes to whoever makes the contribution to the DAF. If you contribute the securities directly, you get the deduction (subject to limits). Your child directs the grants, since it’s their DAF. That’s important to understand.

Also, on the deduction itself, there are limits. For contributions of appreciated securities to a public charity (which a DAF sponsor qualifies as), the deduction is generally capped at 30% of your adjusted gross income in the year of the gift. Anything above that limit can be carried forward for up to five additional years under current rules. If you’re making a large contribution, plan around that with your tax advisor.

Before moving forward, confirm that the DAF sponsor will accept contributions from a third party. Some DAF providers limit contributions to the account advisor, meaning the person who opened and controls the account. If that’s the case with your child’s DAF, you may need to consider other options.

This Isn’t the Right Move for Every Family

This strategy works well in specific situations. But it doesn’t work for everyone, and it’s important to think through the implications.

For it to make sense, a few things generally need to be true at the same time. You’re holding appreciated securities with a meaningful embedded gain. You have genuine charitable intentions, not just a desire to reduce taxes. And you have enough taxable income that a large deduction actually reduces your tax bill meaningfully.

But depending on your goals and your overall financial picture, other approaches might make more sense.

Some families are better off realizing some or all of the gains at long-term capital gains rates. Maybe you want to rebalance your portfolio. Maybe you need liquidity. Maybe the position has become too concentrated and the risk of continuing to hold it outweighs the tax costs. Paying capital gains tax isn’t always the wrong answer. Sometimes it’s the right one.

Others may want to hold the securities and pass them to heirs at death. When you die, your heirs receive your assets at their fair market value on the date of death. That’s called the “step-up” in basis, and it effectively wipes out the embedded gain. If you bought shares at $20,000 and they’re worth $150,000 when you die, your heirs’ cost basis becomes $150,000. No capital gains tax is owed on that appreciation.

That’s a meaningful benefit if you’re in reasonably good health and have other assets to draw on. The catch is that it requires you to actually hold the position until death. If the stock drops significantly before then, the step-up shrinks or disappears (possibly becoming a step down in basis). And the step-up strategy does nothing for your kids (or you) today.

The DAF contribution approach is most compelling when you and your kids have charitable goals that are real, when the position has grown large enough that the embedded gain is a genuine concern, and when the deduction is actually useful to you given your income situation.

How to Get it Done

If this looks like the right move, the process is relatively straightforward. Your child opens a DAF account. You transfer appreciated securities directly from your brokerage account to the DAF, assuming the sponsor allows third-party contributions. The DAF sells the shares, and your child can then recommend grants to qualified charities over time (and invest the DAF assets in the meantime).

Most DAF sponsors handle these transfers regularly. But confirming the contribution rules with the specific DAF sponsor before initiating a transfer is an important first step.

If your child doesn’t have a DAF set up yet, that’s the starting point. Accounts can typically be opened with a relatively small initial amount, and many sponsoring organizations accept securities contributions as the initial funding.

Worth a Closer Look

This isn’t a strategy to pursue without talking to your tax advisor and financial planner first. The deduction limits, gift tax rules, DAF provider policies, and your overall financial picture all affect whether it makes sense in your specific situation.

But for families where the pieces align, contributing low-basis securities to a child’s donor advised fund is one of the more efficient ways to move appreciated assets, reduce a potential tax liability, and support the next generation’s charitable giving at the same time.

This content is for educational purposes only and does not constitute tax or financial advice. Tax laws can change, and individual situations vary. Please consult with your tax advisor for guidance specific to your circumstances.

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¹ Source: Ycharts. Total return reflects reinvested dividends. Past performance is not indicative of future results.