Jill On Money: Changes to charitable giving

The recently passed tax bill implements three major changes to charitable giving beginning in 2026: (1) the deduction cap for top-bracket taxpayers falls from 37% to 35% of a dollar, (2) itemizers must give more than 0.5% of AGI before any deduction applies (e.g., gifts must exceed $1,000 on $200,000 AGI), and (3) standard filers receive a new $1,000 ($2,000 joint) above-the-line cash donation deduction (not for DAFs). Wealthier donors are being advised to accelerate and bunch gifts into 2025 or fund donor-advised funds this year to lock in current deduction limits, while the piece also flags fraud risks and payment-safety best practices. These changes may modestly alter high-net-worth giving timing and DAF inflows but are unlikely to move broad markets.

Analysis

Market structure: Custodians and DAF platforms (Charles Schwab/SCHW, State Street/STT, BNY Mellon/BK) are the direct winners as donors rush to lock 2025 deduction rules; expect a concentrated inflow into DAFs in Q4 2025 — our base case is a 10–25% bump in DAF contributions versus a normal quarter, with a likely 1–3% permanent reduction in itemizer-driven charitable giving from 2026 onward. Large public charities that rely on high-itemizer donors may see a modest revenue reallocation (fewer, larger DAF grants vs. more direct small gifts).

Risk assessment: Tail risks include IRS guidance that restricts non-cash assets to DAFs or a legislative reversal that changes the 2025 window; either could compress expected AUM gains for custodians. Timewise, the critical horizon is immediate to year-end 2025 (donation timing), with clearing/flow effects visible into Q1–Q2 2026; hidden dependencies include equity market performance (affects willingness to donate appreciated securities) and operational capacity at custodians to onboard new DAF assets.

Trade implications: Tactical longs on retail-focused custodians (SCHW) and money-market fund managers should capture inflows; consider 2–3% position sizes and hedged option structures to limit drawdowns if flows disappoint. Pair trades: long SCHW vs short STT/BK reflect retail DAF advantage vs institutional custody exposure; add small (1–2%) overweight to cybersecurity names (CRWD, PANW) to hedge increased fraud/prevention spend.

Contrarian angles: The market may overprice a permanent boon to DAFs — post-2025 the $1k standard-filer incentive and reduced marginal tax benefit could cause DAF inflows to snap back; historical parallel: SALT-cap driven bunching in 2018 produced a transient custody AUM spike, not a sustained step-change. Unintended consequence: oversized year-end DAF inflows could force custodians into short-duration fixed income purchases, tightening CP/T-bill spreads; monitor Schwab DAF AUM weekly and IRS guidance for surprises.

Key Decisions for Investors

• Establish a 2.5% long position in SCHW (Charles Schwab) immediately, sized to portfolio risk, with plan to trim 50% on 15-Jan-2026 and exit remaining by 31-Mar-2026 if DAF AUM growth is <10% QoQ in Q4 2025.
• Buy a limited-risk call spread on SCHW expiring Mar 2026 (example: buy Mar-2026 calls, sell Mar-2026 higher strike to finance) sized to 0.5% portfolio risk to capture year-end DAF flow re-pricing while capping downside.
• Execute a relative-value pair: long SCHW 1.5% vs short STT (State Street) 1.5% from now to 30-Jun-2026; unwind if SCHW outperforms STT by >8% before 31-Jan-2026 or if custodial DAF inflows miss the 10% QoQ benchmark.
• Initiate small hedges into cybersecurity names (e.g., CRWD, PANW) 0.5–1.0% each to protect against higher fraud/security spend; review positions at 90 days or if SEC/IRS issues guidance on charitable fraud schemes.