On June 9, 2021, US sensors Charles Grassley (R-Iowa) and Angus King (I-Maine) introduced the Accelerating Charitable Efforts (ACE) Act. If passed, the ACE Act would significantly change the requirements for donor advisory funds (DAFs) and private foundations (PFs). Proponents of the law argue that the ACE law will ensure that funds earmarked for charity reach charity recipients quickly. Opponents of the ACE Act claim the changes are unnecessary and will have a charitable deterrent effect.
DAF regulations
Here is a summary of the regulations governing DAFs.
Qualified DAF. The bill includes new definitions of a qualified DAF and an unqualified DAF. A qualified DAF must distribute all funds to qualified charities within 15 years of the donation. A donor would receive an advance charitable income tax deduction for gifts to a qualified DAF.
Unqualified DAF. If a donor is contributing to an unqualified DAF (one who does not pay out all assets within 15 years), the donor is not allowed to claim an upfront income tax deduction. On donations in kind, a donor cannot claim income tax deduction for charity until the DAF sponsor sells the asset for cash and distributes the proceeds to a qualified charity. In addition, a donor cannot claim any income tax deduction for any contribution until the tax year in which the DAF administrator distributes the contribution to a qualified charity. Any charitable income tax deduction is limited to what is paid to a qualified charity. The DAF sponsor must distribute contributions within 50 years of the donation. If a DAF administrator does not fully distribute a DAF within this period, the DAF administrator will be charged an excise duty.
Qualified community DAF. The bill also introduces a new definition of “Qualifying Community Donating Fund” – a DAF controlled by a “Qualifying Community Foundation” (QCF). A Qualified Community DAF would not be subject to the restrictions discussed above if the Qualified Community DAF met at least one of the following requirements:
- No individual may have advisory privileges in relation to one or more Community Foundation sponsored DAFs with a total value of over $ 1 million; or
- According to a written agreement, the donor sets up the DAF and demands dividends of at least 5% of the value of the DAF’s assets per calendar year.
A QCF is a community trust organized as a charity under Internal Revenue Code Section 501 (c) (3) that serves a geographic area of no more than four states. In addition, a QCF must hold at least 25% of its assets outside of DAFs.
Non-profit deduction from income tax for gifts of unlisted assets. No charitable income tax deduction is allowed on non-publicly traded assets donated to an Eligible DAF or an Eligible Municipal DAF until the asset is sold. In addition, the income tax deduction would be limited to the value of the proceeds.
DAF distributions and the public support test. For the purposes of calculating support to a public charity under IRC sections 509 (a) (2) and 170 (b) (1) (A) (vi), the support will be treated as if it were provided by them if the sponsoring organization identifies the donor donor. However, if the donor is not identified, the support is aggregated with all support from unidentified DAF donors as if a single person provided the support.
Excise tax on undistributed contributions. If the distribution is not made on time after the end of the consultation privilege, a consumption tax of 50% of the contribution, including any income from it, will be levied by the sponsoring organization.
PF provisions
Here is a summary of the provisions regarding PFs.
Administrative expenses paid to disqualified individuals. The bill would exclude administrative expenses paid to disqualified individuals from being treated as qualified distributions.
Distributions to DAFs. The bill would not allow a distribution to a DAF to be treated as part of a PF’s 5% annual payout unless the DAF makes a qualifying distribution of the contribution in the same year.
Tax exemption for investment income. PFs making qualifying distributions of 7% or more of the PF’s assets would be exempt from tax on investment income for the relevant tax year.
In addition, temporary PFs (ie those with a term of no more than 25 years and that do not make distributions to other PFs (other than other temporary PFs) that have an excluded person in common) would be exempt from capital gains tax. A clawback tax would apply to a PF that initially met the requirements but later did not meet the requirements.
Support of the ACE law
Proponents of the bill claim the legislation will result in more donations going to charities in a timely manner. The fact that DAFs currently hold US $ 140 billion with no distribution obligation is cited as a compelling reason for the legislation. According to Senators Grassley and King’s press release, the proposed bill will restore the link between charitable tax breaks and charitable contributions. Additionally, the Initiative for Charitable Giving, which supports the bill, identified two concerns that it believed the legislation would address:
- the current discrepancy between when income tax is deducted and the benefit granted to charities for DAFs and private non-operating foundations.
- the lack of disincentives to discourage permanent DAFs and PFs.
Disadvantages of the ACE law
Opponents of the law argue that “there is no data on whether these measures would encourage more charitable giving”. Critics point out that DAFs increased grants to charities by nearly 30% in 2020, according to the National Philanthropic Trust’s COVID scholarship survey. Generally, DAFs pay out around 20% each year without a mandatory withdrawal requirement. Fidelity Charitable, the country’s largest DAF provider, which donated $ 9.1 billion to charities in 2020, reports that for every $ 100 donated to Fidelity Charitable, $ 76 And $ 89 has been donated to charities over 10 years (Fidelity Charitable Giving Report 2020). Critics therefore argue that the withdrawal requirements that the bill would impose are unnecessary as donations are already increasingly flowing from DAFs.
Provisions that would affect PFs have also come under fire. The ban on PFs from counting gifts to DAFs as part of the 5% PF annual payout “ignores the many valid and useful ways that private foundations can use DAFs to further their charitable missions”. Uses include donor privacy protection for grants for controversial purposes; Granting one-off payments for special purposes, such as disaster relief, without committing to further donations; and pooling resources with other donors without placing significant administrative oversight on the receiving charity. Provisions that prohibit PKs employing family members from claiming salaries and expenses as administrative expenses have been criticized as an unnecessary penalty because “data shows that family foundations are not more likely to claim high administrative expenses than employee-run foundations”.
Effective Date
Charitable donors who want to ensure their donations are subject to applicable laws should consider making donations prior to the proposed enactment of the bill, January 1, 2022.
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