In June 2021, Senators King (I-Maine) and Grassley (R-Iowa) introduced the bipartisan Accelerating Charitable Efforts (ACE) Act. If enacted, this proposed legislation would modify the charitable deduction rules for contributions to donor-advised funds (DAFs) and reform private foundations dramatically. This article explores the proposed changes and their significance.
What is a donor-advised funds (DAF)?
A DAF is a private fund, administered by a third party (called a sponsoring organization) created for the sole purpose of managing charitable donations for an individual, family, or organization. Under current law the advantage and appeal of DAFs is multifaceted:
- DAFs offer donors ease of administration.
- DAFs offer donors control over how funds are distributed and invested because, although the funds are legally controlled by the sponsoring organization, the donor enjoys advisory privileges.
- DAFs offer substantial tax benefits. First, donors have the ability to deduct substantially larger amounts than they could via contributions to a private foundation. Donors also may deduct the full fair market value of appreciated assets contributed to the DAF, thereby capturing a much larger deduction than the donor’s tax basis (and thus avoiding capital gain taxes upon the sale of the asset). Finally, donors may claim deductions upfront at the time of donation – even though the funds donated may not yet have been used for any charitable purpose.
How would the ACE Act change the rules applicable to DAFs?
If passed, the ACE Act would (1) postpone the donor’s ability to claim a tax deduction and (2) limit the amount of the deduction that can be claimed.
The ACE Act introduces new classifications of “qualified” and “nonqualified” DAFs, based on (1) the duration of the donors’ advisory rights and (2) the type of sponsoring organization. The timing and amount of deduction available for contributions would depend on whether the DAF is qualified or nonqualified, with contributions to qualified DAFs receiving more favorable treatment and contributions to qualified community foundation DAFs receiving the most favorable treatment. To be a qualified DAF, the donors’ advisory privileges must expire within 15 years of the date of donation and to be a qualified community foundation DAF, the sponsoring organization must be a geographically limited charity serving no more than four states and having no more than 75% of its assets in DAF form.
The timing and amount of deduction available would also depend on whether the contribution was cash or non-cash (e.g., appreciated stock). Deductions for cash and non-cash contributions to a nonqualified DAF would be available only upon qualifying distribution by the DAF to a charity and would be limited to the amount actually distributed. Deductions for cash contributions to a qualified DAF would be available immediately and prior to distribution, but, in the case of non-cash contributions, would be available only after the asset is sold and reduced to cash by the DAF – and the deduction would be limited to the net sale proceeds actually received by the DAF.
Additionally, the ACE Act would require contemporaneous documentation of the donation from both the donor and the sponsoring organization.
How would the ACE Act impact private foundations?
Under the ACE Act, private foundations would face significant reform as well.
Under current rules, private foundations must make minimum distributions of ~5% of assets in any given year. Under the ACE Act, private foundations face restrictions as to what counts toward that 5%. For example, certain administrative expenses, such as payments to disqualified persons (for example, salaries paid to substantial contributors and/or their family members) would no longer count toward meeting the minimum distribution requirements. Furthermore, payments to DAFs would also not count toward the minimum distribution requirement.
Additionally, in some circumstances private foundations are subject to an annual excise tax of 1.39% of net assets. Under the ACE Act, any private foundation that distributed at least 7% of net assets to charity would be exempt from imposition of the 1.39% excise tax. Furthermore, the excise tax would be eliminated as to any “limited duration foundation,” meaning a foundation established with a duration of less than 25 years per its governing documentation.
When would the changes take effect?
The ACE Act has a prospective effective date – meaning that, if enacted, it would only apply to contributions made in tax years following the date of enactment.
What does all this mean for donors?
Although this bill is not yet a law, it could move that way – or pieces of it could be added to other legislation. The likelihood that some or all of the bill will pass is increased because it is a bipartisan bill – Senator Grassley is a Republican and although Senator King is an Independent, he caucuses with the Democrats, and bills with bipartisan sponsorship generally stand a better chance of success.
If you believe these proposals would adversely affect you or your family, we encourage you to contact us immediately to discuss possible action before implementation.