A bill introduced last month in the U.S. Senate would add rules about how quickly donor-advised funds must distribute money to charity, but critics say the rules are unnecessary and could have the unintended consequence of hurting charitable giving.
The Accelerating Charitable Efforts Act, or ACE Act, was introduced last month by senators Angus King, a Maine independent, and Chuck Grassley, an Iowa Republican. It targets DAFs, which are tools for individual giving. Donors can set up a DAF and contribute funds to it for an immediate tax break, then distribute those funds to charity later. Currently, there are no rules about when DAF funds must be distributed.
DAFs have been around for decades, but their numbers have grown quickly in recent years, and Grassley and King said their legislation is intended to keep donors from using the funds solely for tax reasons.
“Under current rules, donor-advised funds and private foundations allow some to receive tax breaks for donations that never actually reach working charities,” King said in a June 9 statement announcing the legislation. “The ACE Act will clear up those gray areas, and ensure that charitable contributions will swiftly reach the worthy organizations doing good in communities throughout the country and all over the world.”
The legislation would replace existing DAF rules and create two new types of DAFs.
In one type, a DAF donor could get an immediate tax break if the funds in the DAF are distributed within 15 years. In the other type, a DAF could hold donations for up to 50 years. In this scenario, the donor would still receive immediate capital-gains and estate-tax benefits, but he or she would not be able to take an income tax deduction on the donation until the funds were distributed to charity.
Donors with $1 million or more in a DAF would qualify for upfront tax benefits only if they distribute at least 5% of the DAF’s assets each year or distribute it within 15 years.
Those in the philanthropic world are critical of the bill.
“The bill appears to be a solution in search of a problem. We can’t understand what the problem is,” said Jane Greenfield, president of Vanguard Charitable. Based near Philadelphia, Vanguard Charitable is an independent charity launched by financial giant The Vanguard Group Inc. as a vehicle for administering DAFs.
According to the National Philanthropic Trust, annual payout rates from DAFs are consistently above 20%. In 2019, the most recent year for which data is available, the payout rate was 22.4%.
Claudia Cummings, president and CEO of the Indianapolis-based Indiana Philanthropy Alliance, said the proposed legislation would “likely have a chilling effect” on philanthropy.
She particularly opposes the provision that would require DAFs to distribute all their funds within a certain time frame.
One of the advantages of a DAF, Cummings said, is that it allows donors to create a fund that grows over time, enabling donors to make larger gifts that can have a more significant impact. Donors can also name successor advisers who can take control of account distributions after the original donor’s death.
That growth potential is diminished, she said, if the DAF must be depleted in a certain time frame.
Greenfield worries that the proposed legislation might create unintended consequences that end up dampening charitable giving. “Right now, giving is so strong from DAFs. And it’s really risky to mess with that, because the need continues to be so great.”•