Donor-Advised Funds Added To New Federal Legislation

A push to revamp charitable giving laws for the first time in a half-century — particularly around donor-advised funds (DAFs) — has yielded legislation supported by two prominent U.S. senators.

The Accelerating Charitable Efforts (ACE) Act would establish a timeline — but no requirement to distribute — for donations to working charities from DAFs and replace existing DAF rules with two new types of DAFs. The measure is sponsored by Sen. Angus King (I-Maine) and Sen. Charles Grassley (R-Iowa).

The Initiative to Accelerate Charitable Giving (IACG) launched this past December with proposals to reform charitable giving laws, especially those governing DAFs. An estimated $140 billion is set aside for future charitable gifts in DAFs. The most recent episode of The NonProfit Times’ Fresh Research podcast features interviews with Boston College Law Professor Ray Madoff of IACG, who has suggested DAF reforms for years, and Howard Husock of the conservative Philanthropy Roundtable, which has come out against reforms to DAF rules.

In a statement, the IACG said the bill reflects policies outlined in its principles and “puts them into action in a pragmatic and thoughtful way that will produce a result all members of Congress can agree with: getting more money to our nation’s charities faster.”

The coalition includes private foundations such as the Ford Foundation, Hewlett Foundation, and W.K. Kellogg Foundation, as well as philanthropists John Arnold, Kat Taylor and Melanie Lundquist.

The ACE Act would establish a 15-year DAF and a 50-year DAF. In a 15-year DAF,  a donor would get upfront tax benefits like they do under current law but only if funds are distributed (or advisory privileges released) within 15 years of the donation. To avoid overvaluations, the income tax deduction for complex assets – such as closely-held or restricted stock – would be the amount of cash made available in DAF accounts as a result of the sale of the asset (instead of the appraised value).

In a 50-year DAF, donors who want more than 15 years to distribute their funds would be allowed to elect an “aligned benefit rule.” A donor would be able to continue to receive capital gains and estate tax benefits upon donation but would not receive the income tax deduction until the donated funds are distributed to the charitable recipient. Funds would be required to be distributed outright to charities no later than 50 years after their donation.

Community foundations will receive certain exemptions under the bill to support their place-based, mission-driven work. The ACE Act will allow any donor to hold up to $1 million in DAF funds at any community foundation without being subject to payout rules. For amounts of more than $1 million, a donor still can receive up-front tax benefits if the DAF requires a 5% annual payout or if donations must be distributed within 15 years of contribution.

The legislation also would change existing rules governing private foundations. Salaries or travel expenses to a donor’s family members, or through distributions to DAFs, would no longer be counted toward payout obligations.

Several groups quickly came out against the legislation, including the Council on Foundations (CoF), Community Foundation Public Awareness Initiative, and Philanthropy Roundtable.

CoF leaders believe several provisions would negatively impact the philanthropic sector including, “establishing new and unnecessary requirements for DAFs,” prohibiting private foundations from including contributions to DAFs as part of their annual payout obligations, and prohibiting expenses of staff and board members who are family members at a family foundation from being counted toward payout obligations.

Philanthropy Roundtable leaders described the legislation as an attack on charitable giving. “The best way to expand and encourage giving is to ensure that everyone can participate, but more mandates and regulations on giving will make it harder for all Americans to support the causes they care about and those who are struggling — the people who benefit from charity the most,” the organization said in a statement.  “While we plan to look at this legislation more closely, these types of proposals have been controversial in our sector in the past, and the Roundtable’s main concern is that restricting charitable giving will inevitably suppress giving overall, decrease grantmaking to charities and hurt communities in need.”

Leaders at the Community Foundation Public Awareness Initiative (CFPAI), which includes more than 130 U.S. community foundations, said in a statement that while it’s still reviewing details of the proposal but “placing restrictions on DAFs are solutions in search of problems.” The group is not “opposed to all DAF reforms,” provided that they:

  • Are supported by data;
  • Address real problems;
  • Do not significantly increase administrative costs for smaller DAF sponsors, such as small and rural community foundations with assets of less than $20 million; and,
  • Do not artificially restrict their ability to address problems in their communities.

The rules proposed for some community foundation DAFs appear to make sense on the surface, according to CFPAI, however, they could “negatively impact our valuable partnerships with local charities and other philanthropies. Like many of the other provisions in the proposal, we fear the unintended consequences of a carve-out would outweigh any potential benefits.”