How Rich People Avoid Taxes Through Charity: The Real Mechanics of Charitable Trusts

When you hear about billionaires giving millions to charity, it’s easy to assume they’re being generous. But behind many of these donations is a well-structured financial move that saves them millions in taxes. This isn’t about guilt or greed-it’s about how the tax code works. And the most common tool they use? Charitable trusts.

Charitable trusts aren’t just donation boxes. They’re legally binding financial instruments designed to give money to nonprofits while letting the donor keep control, reduce taxes, and sometimes even get income back. The IRS allows this because it encourages giving. But the system is stacked in favor of those who can afford legal teams and financial planners.

How a Charitable Trust Actually Works

Imagine someone owns a $50 million stock portfolio. If they sell it all, they’ll owe capital gains tax-roughly $10 million at today’s 20% rate. Instead, they put the stocks into a charitable remainder trust. The trust sells the stocks tax-free. Then, it pays the donor 5% of the trust’s value each year-for life. That’s $2.5 million a year, tax-free on the principal, with only a small portion taxed as income. After the donor dies, the remaining money goes to charity.

Here’s the twist: the donor gets an immediate tax deduction. Not for the full $50 million, but for the present value of what charity will eventually get. Using IRS tables, that deduction might be $35 million. That means they can offset nearly all their income from other sources for the next decade. No taxes on that $35 million deduction. They keep their lifestyle, avoid the capital gains tax, and give to charity-all at once.

Donor-Advised Funds: The Quiet Powerhouse

Another popular option? Donor-advised funds (DAFs). These aren’t trusts, but they work similarly. A donor gives cash, stocks, or crypto to a sponsoring organization like Fidelity Charitable or Vanguard Charitable. They get an immediate tax deduction. Then, over years or decades, they recommend where the money goes-say, to a local food bank or a university.

Here’s why this is powerful: you can donate highly appreciated assets. Buy $10,000 in Apple stock. It grows to $1 million. You donate it to a DAF. You deduct $1 million. You pay $0 in capital gains. The DAF sells it tax-free. The charity gets the full $1 million. You get your deduction. No one else can do this. Not even small businesses.

According to the National Philanthropic Trust, over $30 billion was contributed to DAFs in 2024. The average donor gave $150,000. But the top 1% gave over $1 million each. And 78% of those donors waited more than a year before recommending grants. That means the money sat in the fund, earning interest, while the donor enjoyed the tax break.

Private Foundations: For the Ultra-Rich

For billionaires who want total control, there’s the private foundation. It’s a nonprofit they set up themselves. They fund it with $100 million. They get a deduction. They pay themselves a salary as executive director. They hire their cousin as grant officer. They fund their alma mater, their museum, their climate research lab.

Here’s the catch: they must give away 5% of the foundation’s assets each year. That sounds strict-but $100 million times 5% is $5 million. That’s more than most nonprofits raise in a decade. And the rest? It grows. Tax-free. Forever.

Compare that to a regular nonprofit: they have to fundraise every year. They can’t invest $100 million and let it compound. They’re always scrambling. The ultra-rich? They build permanent endowments. And the IRS lets them.

Why This Isn’t Fair

Let’s say you make $80,000 a year. You donate $2,000 to your local food bank. You get a $2,000 deduction. You save maybe $400 in taxes. The rich? They donate $10 million. They save $3.7 million. The tax code doesn’t reward generosity-it rewards scale.

And there’s another layer: timing. A middle-class person gives what they can, when they can. A billionaire can donate during a high-income year-say, after selling a company-and get a massive deduction. Then, they don’t give the money away for 10 years. The charity waits. The donor’s wealth keeps growing. The IRS doesn’t care.

There’s no cap on how much you can deduct. No limit on how long you can delay giving. No requirement to prove the charity actually uses the money. You can fund a trust, name it after yourself, and never write a single check.

What’s Being Done About It?

Lawmakers have tried. In 2022, the Build Back Better Act proposed limiting charitable deductions to 28% of income and requiring payouts within five years. It failed. In 2024, Senator Elizabeth Warren introduced the ENOUGH Act, which would cap deductions at $10 million per year and require 75% of DAF funds to be distributed within 15 years. It didn’t pass.

Meanwhile, the IRS barely audits these trusts. Less than 0.1% of private foundations get audited. And when they do? Penalties are rare. Most are just asked to file better paperwork.

Some charities are pushing back. The Chronicle of Philanthropy reported in 2025 that over 600 nonprofit leaders signed a letter calling for reform. They argue that DAFs are becoming tax shelters disguised as philanthropy. One director said, "We’re waiting for money that was promised ten years ago. Meanwhile, people are going hungry."

Is It Legal? Yes. Is It Ethical? That’s Up to You

There’s no law against using a charitable trust to reduce taxes. It’s been legal since 1969. And it’s used by some of the most respected names in business: Gates, Buffett, Zuckerberg. They all use trusts and DAFs. The system works as designed.

But here’s the reality: the system was designed for small, local charities-not for billionaires to defer taxes while their wealth multiplies. The average American gives 3% of income to charity. The top 0.1% give 1.5%. But they give hundreds of millions. The math doesn’t add up to fairness.

Maybe the answer isn’t to stop giving. Maybe it’s to change the rules. Require payouts. Cap deductions. End the delay. Make charity real-not a tax loophole.

What You Can Learn From This

If you’re not rich, this might feel irrelevant. But it shouldn’t. These rules affect everyone. When the wealthy reduce their tax burden through trusts, the rest of us pay more. Property taxes rise. Schools get underfunded. Social programs shrink.

And if you ever plan to leave money to charity? You can still use these tools-but you need to know how. A simple charitable remainder trust can help you avoid estate tax. A DAF can help you give strategically. But don’t assume it’s just for the rich. The tools are the same. The access? That’s where the gap is.