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Changes to DAF Rules Drafted, Again, on Capitol Hill

Congressional representatives introduced companion legislation this week that would set timelines on when donations to donor-advised funds (DAF) would have to be distributed to working charities.

The Accelerating Charitable Efforts (ACE) Act, introduced by Rep. Chellie Pingree (D-Maine) and Rep. Tom Reed (R-N.Y.) with Rep. Ro Khanna (D-Calif.) and Rep. Katie Porter (D-Calif.), is similar to a measure introduced in the Senate last June by Angus King (I-Maine) and Chuck Grassley (R-Iowa).

The legislation would update regulations for private foundations and set timelines for distributions from DAFs. The full text of the ACE Act can be accessed here.

“The coronavirus pandemic highlighted just how important working charities are to our communities,” Pingree said in a prepared statement announcing the legislation. “For countless Mainers and people across the country, charitable organizations are life-changing and lifesaving,” she said, yet $1 out of every $8 donated to charities goes to DAFs, giving generous tax breaks for charitable contributions but not ensuring the funds help anyone in need. “Our half-century old philanthropy laws must be reformed to correct this fundamental flaw in our current system,” she said.

The Initiative to Accelerate Charitable Giving (IACG), led in part by billionaire philanthropist John Arnold and Boston College law professor Ray Madoff, helped to develop the basis for the proposals. In a statement, IACG leaders said they are “pleased that policymakers continue to seek a legislative solution to restore the connection between charitable tax benefits and direct contributions to charities.” The bill is “a step toward getting more resources to our nation’s charities faster. It’s a thoughtful and pragmatic approach that takes the policy ideas outlined in the coalition’s statement of principles and puts them into action at a time when charities across our communities need more help than ever.”

Proponents of the federal reform estimate some $160 billion is set aside for future charitable gifts. While the funds are dedicated to charities once the contributions are made, there is no requirement to ever distribute them. Commercial DAFs, such as Fidelity Charitable and Schwab Charitable, have ballooned over the past decade, in part due to increasing contributions as well as appreciated assets to become some of the largest charities in the nation with tens of billions of dollars in assets.

The legislation would create two new types of DAFs:

  • 15-year DAFs would allow donors to receive upfront tax benefits as they do under current law but only if funds are distributed within 15 years of the donation.
  • 50-year DAFs would allow donors to elect an “aligned benefit rule,” continuing to receive capital gains and estate tax benefits upon donations but not the income tax deduction until all donated funds are distributed to charity. All funds would be required to be distributed to charities no later than 50 years after their donation.

Donors would be allowed 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 would still receive up-front tax benefits if the DAF requires a 5% annual payout, or if donations must be distributed within 15 years of contribution.

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For private foundations, salaries and travel expenses to a donor’s family members, or distributions to DAFs, could not be included in annual 5% payout obligations.

Opponents of the legislation have said the measures to increase DAF distributions are solutions in search of a problem, noting that DAFs typically distribute at a higher annual rate than the 5% required of private foundations.

“When people have the flexibility to give how, when and where they choose, it spurs even more generosity and uplifts those who we all wish to help,” Elizabeth McGuigan, director of policy at Philanthropy Roundtable, said in response to the House bill’s introduction. “A bill that disincentivizes giving is tone deaf at best and at worst hurts communities around the country who rely upon their fellow Americans’ generosity.”

Several groups quickly came out against the King-Grassley bill after it was introduced last summer. The Council on Foundations (CoF) has said the legislation instead would “decelerate the expansion of charitable giving” in the U.S. by adding complexity and costs for foundations and donors and making it harder for philanthropy to “address emerging and long-term challenges.”

The Washington, D.C.-based advocacy group instead has proposed its own recommendations through a Strengthening Community Philanthropy Ad Hoc Working Group that includes 11 community foundation leaders.

This article was originally published by The NonProfit Times. It is reprinted with permission.

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Mark Hrywna

Senior Editor, NonProfit Times. Journalist currently covering various aspects of the nonprofit sector, including fundraising, finance, technology and more for The NonProfit Times, a national trade publication.

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