Proposed bipartisan legislation known as the Accelerating Charitable Efforts (ACE) Act would reform tax laws to require Donor Advised Funds (DAFs) to disburse charitable dollars to working charities more quickly.
Currently, DAF account holders receive a tax deduction in the year in which they fund the account, but there is no distribution requirement for the DAF to make a charitable grant. At this time, more than $140 billion in funds designated for charitable causes are being held in DAFs.
As proposed, the ACE Act would reform tax laws requiring DAFs to distribute funds to nonprofits within a reasonable period of time and keep charitable funds from sitting in investment accounts when the donor(s) have already received tax deductions for their contribution.
The ACE Act would divide DAFs into four new categories. The tax benefit to a donor who makes a gift to a DAF will differ depending on which type of DAF receives the gift. The goal is to reduce the timing mismatch between when the donor receives a federal income tax deduction and when the charity receives a grant from the DAF. The four categories are:
Qualified Donor Advised Funds (QDAF)
Donors get all tax benefits at the time of contribution if the account is distributed within 15 years. If the QDAF fails to distribute the contribution (including earnings), the organization faces a penalty (excise tax) equal to 50% of the contribution that was not distributed by the required date.
When a donor contributes a non-publicly traded asset to a QDAF, he or she will receive a charitable deduction until the sponsoring organization sells the asset. A non-publicly traded asset is described as “any asset for which (as of the date of the contribution) market quotations are not available on an established securities market.” A donor who contributes assets other than those non-publicly traded should receive a charitable deduction in the year of the contribution, subject to regular rules governing charitable deductions.
Non-Qualified Donor Advised Funds (NQDAF)
This is similar to a QDAF, but monies must be distributed within 50 years. Failure to do so also results in a penalty of 50% of the undistributed contributions and earnings. Donors of cash receive charitable tax deductions in the year that includes the date the sponsoring organization made a qualifying distribution of the contribution. The amount of the deduction is limited to the amount of the qualifying distribution.
When a donor contributes property other than cash, he or she receives a charitable deduction in the year that the property is sold for cash and the sponsoring organization made a qualifying distribution of the sale proceeds.
Qualified Community Foundation Donor Advised Fund (QCF-DAF)
There are two types of QCF-DAFs, both of which must be sponsored by a Qualified Community Foundation (QCF), an organization that operates for the purpose of understanding and serving the needs of a particular geographic community by engaging donors and pooling donations to create charitable funds in direct furtherance of those needs and which holds at least 25% its total assets outside of DAFs. A donor who makes a gift to a QCF-DAF has the same tax consequences as a donor making a gift to a QDAF described above. The two types of QCF-DAFs are:
One where the donor has advisory privileges and the DAF has an aggregate value at any time of $1 million or less, adjusted for inflation after 2021.
One established under an agreement that requires the DAF to make qualified distributions each calendar year in an amount not less than 5% of the value of the fund determined as of the last day of the preceding calendar year.
The ACE Act would also reform existing rules governing Private Foundations (PFs). Contributions to DAFs from PFs would not count toward the 5% payout requirement unless the funds are distributed from the DAF by the end of the year following the contribution. Salaries, travel expenses and other administrative expenses paid to family members of a substantial contributor to the foundation cannot meet payout obligations.
The ACE Act also provides incentive for faster payouts out of PFs: if a PF were to distribute at least 7% of the value of its assets, the 1.39% excess tax on net investment income would be waived. In addition, the ACE Act would put a maximum lifespan of 25 years on PFs, eliminating families’ abilities to give into perpetuity.
The ACE Act would also impact the public support test for tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code. When a public charity receives a grant from a DAF, it would no longer be treated as coming from a public charity. The sponsoring organization would need to identify the donor to the DAF making the distribution and provide it to the public charity. Certain exceptions would apply. This change would discourage anonymous giving from DAFs and could flip small charities to a PF.
The debate over the ACE Act is far from over. There will likely be opposition from the nonprofit sector for many reasons, including the complexity of the changes that will create significant difficulty to donors and charities alike. For more information, contact your Schneider Downs representative.
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