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New Bill Creates 2 New Types of Donor-Advised Funds; Philanthropy Group Balks

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What You Need to Know

  • The bill would create DAFs from which donations would need to be distributed within 15 years and within 50 years.
  • DAFs allow donors to get tax breaks without ever actually giving the money to charity, lawmakers say.
  • A philanthropy group said the bill would reduce charitable giving.

Legislation introduced Thursday by Reps. Chellie Pingree, D-Maine, and Tom Reed, R-N.Y., the Accelerating Charitable Efforts (ACE) Act, would “reform federal law to ensure funds donated to donor-advised funds (DAFs) are made available to working charities within a reasonable period of time and provide incentives to speed up donation timelines” by creating two new types of DAFs.

The Philanthropy Roundtable is coming out against the bill, arguing that it would restrict charitable giving, ultimately reducing the funds available to U.S. charities.

“The House version of the highly controversial ACE Act imposes arbitrary payout deadlines on DAF gifts, enforced with a 50% tax on the funds’ charitable assets, ignoring the importance of individual freedom and the choice to give how, when and where a donor sees fit,” Elizabeth McGuigan, director of policy at the Philanthropy Roundtable, told ThinkAdvisor on Thursday in an email. “This is not the time to be restricting charitable giving vehicles.”

“Restricting charitable giving, as this bill does, will diminish charitable giving overall,” McGuigan said.

Pingree argued that “the coronavirus pandemic highlighted just how important working charities are to our communities. …. Yet, $1 out of every $8 donated to U.S. charities goes to donor-advised funds, giving the wealthy generous tax breaks for their charitable contributions but not ensuring those funds help anyone in need. Our half-century old philanthropy laws must be reformed to correct this fundamental flaw in our current system.”

DAFs, the lawmakers explained, “currently have more than $140 billion set aside for future charitable gifts — but under current tax laws, the funds have no requirement to ever distribute these resources to working charities. Accordingly, DAFs can accept and hold charitable donations that have generated a federal income tax deduction, but never devote the resources to charitable work.”

The ACE Act, the lawmakers explained, would create two new types of donor-advised funds:

  • 15-year DAFs: The bill will create a new form of DAF under which a donor would get upfront tax benefits (as under current law), but only if DAF funds are distributed (or advisory privileges are 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).
  • 50-Year DAFs: Donors who want more than 15 years to distribute their DAF funds will be allowed to elect an “aligned benefit rule.” Under this rule, a DAF donor would 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. All funds would be required to be distributed outright to charities no later than 50 years after their donation.

The ACE Act, the lawmakers explained, “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 over $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 bill would also reform existing rules governing private foundations, “ensuring that these entities cannot meet payout obligations through salaries or travel expenses to a donor’s family members, or through distributions to DAFs,” the lawmakers said.

Other sponsors of the House bill are Reps. Ro Khanna, D-Calif., and Katie Porter, D-Calif.

Companion legislation introduced in the Senate last year by Angus King, I-Maine and Chuck Grassley, R-Iowa, “would also update regulations for private foundations to fulfill their intended purpose of ensuring a regular flow of dollars to working charities,” Pingree and Reed said.

Elise Westhoff, president and CEO of the Philanthropy Roundtable, added in a statement that “the so-called ACE Act is merely a mirror of the King-Grassley Senate bill that faces firm bipartisan opposition from across the philanthropic sector because more mandates and regulations on giving will make it harder for all Americans to support the causes they care about.”

The House bill, Westhoff said, “does not address our concerns and demonstrates how out of touch some members of Congress are with the American spirit of generosity.”