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

When you hear about billionaires donating millions to charity, it sounds noble. But behind the headlines and photo ops, there’s a well-trodden financial path that lets the wealthy reduce their tax bills-sometimes by millions-while still appearing generous. It’s not illegal. It’s not even uncommon. It’s built into the tax code. And it all starts with something called a charitable trust.

What Is a Charitable Trust, Really?

A charitable trust isn’t just a donation box. It’s a legal structure that lets someone move assets-like stocks, real estate, or private business shares-into a controlled, tax-advantaged vehicle. The donor gives the asset to the trust, and in return, they get an immediate tax deduction based on the asset’s value. The trust then holds and manages the asset, often distributing income to the donor for years, before finally giving the remainder to a charity.

Think of it like this: You own a $10 million piece of tech stock that you bought for $100,000. If you sold it, you’d owe capital gains tax on $9.9 million. At the top federal rate, that’s nearly $2.5 million in taxes. But if you put it into a charitable remainder trust, you get a deduction for the full market value-say, $9 million-immediately. You pay zero capital gains tax. The trust sells the stock tax-free. You get annual income payments from the trust, maybe 5% a year, for life. When you die, whatever’s left goes to your favorite nonprofit. The IRS never sees the $2.5 million in capital gains.

How the Tax Break Actually Works

The magic happens because the IRS treats charitable trusts as tax-exempt entities. That means:

• No capital gains tax when assets are sold inside the trust
• No income tax on investment earnings within the trust
• An immediate income tax deduction for the present value of the future gift

The deduction isn’t just a guess. It’s calculated using IRS tables based on your age, interest rates, and how long the trust will pay you. A 65-year-old donating $5 million might get a $3.2 million deduction. That can slash their income tax bill by over $1 million in one year, depending on their bracket.

And here’s the kicker: you don’t even have to give the money away right away. Many wealthy donors use donor-advised funds (DAFs), which are a type of charitable trust. You contribute cash or assets, get the full deduction immediately, and then take your time deciding which charities to support-sometimes years later. The money grows tax-free while you deliberate.

Real Examples, Not Theory

In 2020, Jeff Bezos donated $10 billion to his own charitable foundation. Publicly, it looked like a grand gesture. But here’s what it actually did: he transferred Amazon stock worth $10 billion into a donor-advised fund. He got a $10 billion tax deduction. He paid no capital gains tax on the $9.9 billion gain. He still controls how the money is spent. And he can keep donating more stock over time, each time resetting the clock on his tax liability.

Elon Musk did something similar when he donated $5.7 billion in Tesla stock to a private foundation. The IRS allowed him to deduct the full value of the shares at the time of transfer-even though he never sold them. The foundation then sold the shares, paid no tax, and used the cash to fund projects. Musk didn’t have to pay a single dollar in capital gains tax.

These aren’t loopholes. They’re features of the tax code. The U.S. has encouraged charitable giving since 1917. But over time, the rules have been shaped by lobbyists, accountants, and lawyers who specialize in high-net-worth estate planning. The system works exactly as designed-for those who can afford the legal fees.

Why Don’t Regular People Do This?

You might be thinking: If it’s this smart, why isn’t everyone doing it?

Because it costs money to set up. A simple donor-advised fund at Fidelity or Vanguard might cost $500 to open. But a custom charitable remainder trust? That requires a trust attorney, a CPA, IRS filings, ongoing reporting, and audits. Total cost: $20,000 to $50,000 upfront. And you need to have at least $1 million in assets to make it worth it. For most people, the tax savings don’t outweigh the setup cost.

Also, the deduction is capped. You can only deduct up to 30% of your adjusted gross income in a year for charitable gifts of appreciated assets. If you donate $5 million, you can only use $1.5 million of the deduction this year. The rest carries forward for up to five years. That’s fine if you’re making $50 million a year. Not so much if you’re making $150,000.

The Bigger Picture: Who Benefits?

There’s nothing wrong with giving to charity. But when the system is designed so that the richest get the biggest tax breaks, it changes the game. The top 1% of earners give about 1.5% of their income to charity. The bottom 50% give about 3%. But the top 1% get 90% of the tax deductions from charitable giving.

Why? Because they give assets, not cash. Assets like stock, land, or private equity. These assets appreciate massively over time. The tax code rewards that appreciation. The IRS treats the gift as if it’s worth its current market value-while ignoring the fact that the donor never paid tax on the gain.

Meanwhile, a teacher who donates $500 from her paycheck gets a deduction of $500. A billionaire who donates $10 million in stock gets a deduction of $10 million. The system doesn’t care about intent. It cares about structure.

What’s the Real Impact?

Some charities benefit. Others don’t. Donor-advised funds have over $150 billion sitting idle right now, waiting to be granted. The average DAF gives out only about 20% of its assets each year. That means billions of dollars are growing tax-free while people decide which cause to support.

Some donors wait years. Some wait decades. Some never give it away at all. In 2023, the Chronicle of Philanthropy found that nearly 1 in 5 DAFs had not made a single grant in the past five years. The money is locked in, earning returns, and the donor keeps the tax break.

That’s not fraud. But it’s not exactly philanthropy, either.

Is This Legal? Yes. Is It Fair? That’s the Question

The IRS allows this. Congress wrote the rules. The tax code says you can deduct the fair market value of appreciated assets given to charity. That’s the law.

But it’s also why so many people feel the system is rigged. A family that can’t afford health insurance gets no deduction. A billionaire who gives $100 million to a foundation they control gets a $100 million tax break. The math works. The ethics? That’s up for debate.

And here’s the thing: the rules are changing. In 2024, the Senate Finance Committee proposed capping charitable deductions at 28% of income for high earners. That would mean someone in the 37% tax bracket could only deduct at the 28% rate-cutting their benefit. Other proposals want to force DAFs to distribute 5% of assets annually. None have passed yet. But pressure is growing.

For now, the system remains. And for those who know how to use it, charitable trusts remain one of the most powerful tax tools in the world.