From Promise to Mission, Accelerated
By Aaron Fox, Partner, Nonprofit Tax Services
For decades, charitable giving has remained relatively consistent at two percent of disposable income1. However, over recent years, there has been a significant shift in where this money goes as more donors give more dollars to donor-advised funds (DAFs) rather than directly to working charities. Donations of non-cash gifts such as art, real estate, and non-publicly traded company shares may also be made to DAFs.
DAFs can serve as a holding zone for charitable donations and provide a great deal of flexibility as to where, how and when funds are distributed. They also offer potentially significant tax advantages. Under current law, donors qualify for an immediate tax deduction while also allowing their funds to grow tax-free.
Contributions to DAFs grew by 80% over the past five years; yet, as DAFs are rising in popularity, the proportional payout from these accounts is decreasing2. The funds – some of which hold billions – are typically managed by large for-profit financial institutions where they earn management fees, a structure critics say only discourages money from being dispersed to those in need. Currently, more than $1 trillion of funds marked for charitable giving are being held in private foundation endowments and DAFs3.
On, June 9, Senator Angus King (I-Maine) and Senator Chuck Grassley (R-Iowa) introduced the Accelerating Charitable Efforts (ACE) Act4, legislation designed to make funds promised to charity available within a definitive timeframe.
Current tax law provides incentives to give; the new legislation aims to encourage timely distribution. In a news release, Senator King stated, “The federal government offers tax incentives to Americans who give back, in order to ensure that these funds are doing the most possible good. We must reform the rules that govern some charitable donations.”
The ACE Act would replace current rules with two DAFs. The first would allow for an immediate tax benefit while ensuring funds are distributed within a short time period. The second would allow a longer time span for distribution, but would require the donor to wait until funds are dispensed before claiming the full tax deduction.
- 15-year DAF: Donors would receive an upfront tax benefit (as per current law) only if funds are distributed or advisory privileges are released within 15 years of the donation. Furthermore, the income tax deduction for complex assets such as real estate would no longer be determined by the appraised value and instead would require cash to be made available in DAF accounts as a result of the sale of the asset.
- 50-year DAF: Donors who desire a longer holding period prior to distribution would be able to elect an “aligned benefit rule,” which allows a donor to continue to receive capital gains and estate tax benefits, but pauses the income tax deduction until the funds are distributed, no later than 50 years after the donation.
Neither DAF would change rules allowing donors to receive immediate capital gains and real estate and gift tax savings.
Additionally, the ACE Act takes steps to ensure more of a private foundation’s annual 5% spending requirement goes to active charity by prohibiting the use of salaries or travel expenses paid to family members, as well as contributions to DAFs, to meet the foundation’s payout obligations. The Act also encourages increased spending by waiving the annual excise tax of 1.39 percent of net investment income if the payout exceeds 7 percent of assets. Any private foundation established after the legislation takes effect would be fully exempt from the excise tax if it agrees to disperse all assets within 25 years.
The bill would grant exemptions for community foundations that sponsor their own DAFs.
- Donations up to $1 million: Donor may hold up to $1 million in DAF funds without being subject to the new rules.
- Donations greater than $1 million: Donor may still receive up-front tax benefits if the DAF requires a 5% annual payout or for donations to be paid out within 15 years.
The legislation largely stemmed from the efforts of the Initiative to Accelerate Charitable Giving, a coalition of philanthropists and leaders of foundations and other charitable organizations driven by the mission “to promote greater and more accountable charitable giving.” The group, formed in January 2020, expected it would be years before Congress took action. But efforts were expedited as the pandemic highlighted the growing need for charitable giving to address current issues.
While the sponsors expect the bill will move forward with support from both sides of the aisle, the legislation is not without controversy. Opponents of the reform include both conservative and progressive organizations, such as the Philanthropy Roundtable and the Council on Foundations, which have a spectrum of ideological objections. Critics voice a range of concerns, from the “overly restrictive” nature of the proposed reforms, which could discourage donations, to assertions that the legislation does not go far enough.
Marcum will continue to monitor the progress of the ACE Act and communicate important updates. If you have questions on charitable giving or requirements as a tax-exempt organization, contact your Marcum advisor.
- Economist.com. A philanthropic boom: “donor-advised finds” https://www.economist.com/finance-and-economics/2017/03/23/a-philanthropic-boom-donor-advised-funds
- National Philanthropic Trust 2020 Donor-Advised Fund Report. https://www.nptrust.org/wp-content/uploads/2021/02/2020-Donor-Advised-Fund-Report-NPT.pdf
- Bloomberg.com. Billionaires Urge Tax Reform to Free $1 Trillion for Charity. https://www.bloomberg.com/news/articles/2020-12-01/billionaires-urge-tax-reform-to-unlock-1-1-trillion-for-charity
- King, Grassley Introduce Legislation to Ensure Charitable Donations Reach Working Charities https://www.king.senate.gov/newsroom/press-releases/king-grassley-introduce-legislation-to-ensure-charitable-donations-reach-working-charities