Debate: Time to Tighten Tax Rules for Donor-Advised Funds?

A proposed regulation would prevent donors to certain fund types from receiving a tax deduction until funds are actually distributed.

Under current law, donor-advised funds (DAFs) allow taxpayers to make gifts to the fund, which are allowed to grow and are eventually distributed to charities. Unlike private foundations, DAFs are not generally required to distribute a certain percentage of their assets to charities each year.

Proposed regulations would create two separate types of DAF. Qualified DAFs would require the DAF to distribute the donations to charity within 15 years of receiving the donation (and the donor would receive an upfront charitable donation deduction). Non-qualified DAFs would have 50 years to distribute contributions. Donors would not receive an upfront deduction but instead would only receive a deduction once funds are distributed to qualified charitable organizations.

We asked professors Robert Bloink and William Byrnes, authors of ALM’s Tax Facts with opposing political viewpoints, to share their opinions about reforming the deduction for charitable donations.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink
Byrnes

Their Reasons:

Bloink: The deduction for charitable giving is an extremely valuable tool that encourages Americans to support charitable causes. Unfortunately, the deduction is also one that is extremely easy to manipulate if the taxpayer has sufficient funds.

Entities like donor-advised funds today are typically only yet another tool for wealthy taxpayers to reap the benefits of the charitable donation income tax deduction without actually giving the funds to a charity within any reasonable time frame. We need to modify the system so that taxpayers only become entitled to a deduction once the qualified charitable organization receives the funds in question.

Byrnes: This proposed change will do nothing but harm the charitable organizations we should be protecting during these challenging times. The rule will discourage the wealthy donors who still have the disposable income to support charity from making large charitable donations at all. The donor-advised fund structure today allows the donor some time to consider where the donation will be best spent and does nothing to harm charitable organizations in the long term.

Bloink: Donor-advised funds and private foundations often function merely as another way for the super-rich to avoid paying any income tax whatsoever. Donated funds are often allowed to sit within the fund for years before any qualified charitable organization receives any type of benefit — and often, that benefit is something that actually benefits the wealthy donor.

Requiring the DAF to distribute funds before taxpayers receive the income tax benefits is a great way to ensure that the charity actually receives the benefit of the contribution and puts those funds to use supporting their charitable purpose.

Byrnes: These mandates will make it much more difficult for Americans to support their philanthropic goals over time. It’s like anything else–the greater the mandates and more complex the regulations, the less appealing it will be for Americans to participate in these valuable charitable giving vehicles. Charities are struggling to provide services in these unprecedented times. Today isn’t the time for a complex overhaul of the system.

Bloink: The average American can’t reap any benefits by donating to these types of funds—because most Americans use the standard deduction rather than claiming itemized deductions. By definition, these funds only provide a tax benefit to the wealthy. The ultra-rich should not receive a tax benefit until the funds are put to good use for the benefit of organizations that need those funds.

Byrnes: Current rules allow DAF funds to grow tax-free and the contribution is irrevocable. While donors may retain some advisory control, they cannot reverse their decision to make the donation. It makes sense that the taxpayer should receive a current benefit in exchange for irrevocably making the charitable donation.

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