Sweeping Changes Proposed for Donor Advised Fund Rules

The Accelerating Charitable Efforts Act (ACE Act), introduced by Senators Grassley and King, aims to restructure the laws governing donor advised funds in order to get donations more quickly to the working charities that need them. Given that over $140 billion in assets are sitting in these accounts, speeding up the flow of these funds into the nonprofit sector could have a substantial impact.

Background. Generally, a donor advised fund, or DAF, is a separately identified account that is maintained and operated by a 501(c)(3) sponsoring organization, and contains contributions made by individual or related donors. Once a donor makes the contribution to a DAF, the sponsoring organization has legal control over it. However, the donor retains advisory privileges with respect to the distribution of funds and the investment of assets in the DAF account. Currently donors who utilize donor advised funds receive an immediate tax benefit for their contributions, despite the fact that it may be years before the funds are disbursed to operating charities. The ACE Act seeks to decrease this gap between the time of the donor’s tax benefit and the time when the funds are actually put toward charitable purposes.

Changes to DAF Landscape. The ACE Act will create two new categories of DAFs, Qualified and Non-Qualified DAFs.

  • A Qualified DAF will have the same upfront tax benefits as current DAFs, but will have the requirement that funds must be distributed, or the release of advisory privileges must take place, within 15 years. Further, a donor must identify at the time of contribution a preferred organization for distribution in the event funds have not been distributed before the donor’s advisory privilege terminates.
  • A Non-Qualified DAF will have a 50-year time period in which to make distributions, but no donor income tax deduction will be allowed until the year in which the Non-Qualified DAF distributes funds to beneficiary charities in a Qualifying Distribution. Qualifying Distributions cannot be made to another DAF and are treated as made from the donor’s contributions, and earnings on those contributions, in a first in, first out basis.

The ACE Act also contains a carve-out for community foundation DAFs if the organization is a Qualified Community Foundation. A Qualified Community Foundation is defined as a 501(c)(3) organization, organized and operated for the purpose of serving a geographic community that is no larger than 4 states, and that holds substantial assets (defined as 25% or more of the organization’s total assets) outside of donor advised funds. The carve-out also requires that the Qualified Community Foundation DAF meet either a minimum yearly payout of 5% of the value of the DAF’s assets or limits advisory privileges to $1 million per donor across all DAFs sponsored by the Qualified Community Foundation. However, other than the limitation on non-publicly traded assets discussed below, no changes would apply with respect to the deductibility of contributions to a Qualified Community Foundation DAF.

The Act also contains a limitation on contributions of non-publicly traded assets to a Qualified DAF or a Qualified Community Foundation DAF, in that these contributions do not give rise to a donor deduction until the asset is sold by the DAF and the proceeds credited to the donor’s account. Private foundations will also not be allowed to treat distributions to DAFs as part of their required 5% annual payout unless the DAF makes a Qualifying Distribution in the same year. Finally, the ACE Act contains a new 50% excise tax on a sponsoring organization for failure to distribute funds from a DAF within the appropriate timeframe (15 years for a Qualified DAF and 50 years for a Non-Qualified DAF).

A Pitched Battle. A number of commentators and organizations have voiced their opposition to the bill stating that it will negatively impact the nonprofit sector, including the Council on Foundations, Philanthropy Roundtable, Initiative Council on Foundations, Independent Sector, United Philanthropy Forum, and the Community Foundation Public Awareness Initiative. Some are saying that the bill works against its own aims because it won’t take effect for contributions until enactment, which may incentivize donors to contribute to DAFs now in order to be grandfathered in before the rules change. Council on Foundations Chief Executive Kathleen Enright stated that if the bill makes it to the floor they expect a “big, pitched battle over it.”

Click here for further information on the ACE Act, including proposed changes regarding substantiation of donations and  other private foundation rules.

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