Changes to DAF Rules Reintroduced on Capitol Hill

Late last week the NonProfit Times reported that Congressional representatives had introduced companion legislation that would set timelines on when donations to donor-advised funds (DAFs) would have to be distributed to working charities.

According to the Times, 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 Senators 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.

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

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 noted that they were  “pleased that policymakers continue to seek a legislative solution to restore the connection between charitable tax benefits and direct contributions to charities.” They labeled the bill “a step toward getting more resources to our nation’s charities faster. . . 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.”

According to the Times report, 

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.

As regards substance, 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.

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 that 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.

The NonProfit Times quotes Elizabeth McGuigan, director of policy at Philanthropy Roundtable, as saying in response to the House bill’s introduction: “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. 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.”

We shall see how the legislation fares this time.

Vaughn E. James, Judge Robert H. Bean Professor, Texas Tech University School of Law