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Legacy Matters

July 12, 2021

The ACE Act Aims to Change DAF and Private Foundation Tax Laws

Senators Angus King and Charles Grassley recently introduced the Accelerating Charitable Efforts Act (“ACE Act”), a bill which is aimed at encouraging donors to increase the flow of money held in donor-advised funds (DAFs) and private foundations into charities. If enacted, the ACE Act would set requirements for the following:

  • How much money must be distributed each year from DAFs and private foundations.

  • How that money can be used.

  • When tax deductions can be taken for contributions to these vehicles.


Current Tax Laws Regarding DAFs and Private Foundations
 
Under current law, donors who contribute to private foundations or DAFs can take a tax deduction in the year of the contribution subject to certain caps related to a donor’s adjusted gross income.
 
In the case of contributions to DAFs, a family can make the contribution and take the deduction in one year and then allow the DAF to distribute those funds over several years. There are no formal federal requirements for the amount of money that a DAF must distribute each year. However, the sponsoring organization for the DAF, especially if it is a community foundation, often has payout requirements, commonly 5% of the fund’s assets annually.

Private foundations, on the other hand, are required to distribute at least 5% of the foundation’s assets each year, and these distributions can go to charities, to DAFs and, subject to certain restrictions, to pay salaries and administrative expenses for the foundation. As foundations are often run by family members, some of the pre-tax money donated to the foundation could end up being paid out to family members to cover salary and expenses related to foundation work. 

PROPOSED CHANGES FOR DAFS:

The ACE Act proposes to create 2 new types of DAFs:

  • 15-year DAFs: 

    • The donor could deduct the full value of the gift in the year that the gift is given (as under current law) as long as the donor commits to distributing all of the funds (or releasing their advisory privileges) within 15 years of the donation.

    • The deduction for complex assets – such as stock in a family business – would be based on the cash made available to a DAF account from the sale of the asset rather than using an appraised value for the asset.

    • The penalty for failing to distribute funds within 15 years is a 50% tax on the remaining assets (and the appreciation on those assets).

  • 50-Year DAFs: 

    • Donors could elect an “aligned benefit rule,” which would provide them with more time (up to 50 years) to distribute the funds in the DAF. The trade-off is that donors cannot take an income tax deduction for the donated assets until the funds are distributed to a charity. Note that capital gains and estate tax benefits would still be provided at the time of the donation.    

Proposed changes for non-publicly traded assets (such as art or family business shares) and assets donated to non-qualified DAFs (those that do not meet the 15-year payout requirements above):

  • No tax deduction would be allowed for the donation of a non-publicly traded asset or for a donation of property to a non-qualified DAF unless the sponsoring organization receives cash from the sale of the property.

  • Tax deductions for donations to non-qualified DAFs may not be taken until the sponsoring organization makes a qualifying distribution of the donation or its sale proceeds.

  • Donors cannot take the tax deduction unless they substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the sponsoring organization that includes, among other information:

    • The name of the donor.

    • A certification that the asset was sold for cash and the amount of the sale proceeds.

    • A certification that a qualifying distribution has been made from the contribution or its sale proceeds, and the amount of the distribution. 

Proposed new rules for DAFs held at community foundations:

  • DAFs under $1 million would not be subject to the above payout rules.

  • If the community foundation has individual donors with DAFs that total over $1 million in aggregate (adjusted annually for inflation), those donors’ DAFs must pay out at least 5% of their assets each year or agree to distribute all assets within 15 years in order to claim the deduction in the year of the donation.  


PROPOSED CHANGES FOR PRIVATE FOUNDATIONS:
 
The ACE Act also includes changes to the rules that govern private foundations:

  • Foundations cannot meet their 5% payout requirement by using distributions:

    • To pay salaries, travel or administrative expenses for any disqualified persons except for the foundation manager (unless the foundation manager is a family member and then their salary and expenses cannot count as part of the 5% payout).

    • To make distributions to a DAF, unless that DAF makes a qualifying distribution of the distributed assets during the same year.

  • A foundation can claim an exemption from the annual excise tax if it meets one of these requirements:

    • It pays out at least 7% of its assets annually in qualified distributions.

    • Its governing documents include a sunset of the foundation within 25 years, and it has not made distributions to disqualified private foundations at any time.

  • In its annual return, a foundation would have to disclose:

    • The dollar amount of each contribution that will be held in a DAF.

    • The sponsoring organization that is holding the DAF.

    • The donation advice given to the sponsoring organization (if any was given).

  • For purposes of determining public support, support from all DAFs where the original donor name has not been provided by the sponsoring organization would not be treated as support from a public charity. Instead these would be grouped together and treated as support received from one person.


OPPOSITION TO THE ACE ACT
 
Proponents of the ACE Act say that the new rules will move millions of dollars being held in DAFs and private foundations to charities who need it. Opponents of this bill have suggested that it would negatively impact charitable giving because:

  • The payout time limit could impact the ability for donors to grow their funds over time to support a charity’s long-term goals, ongoing funding needs or a future project.

  • Selling assets at the time of donation could lead to less money for the charities in the end.

  • The extra requirements imposed by this legislation could place a larger administrative burden on the sponsoring organizations for DAFs, increasing costs and decreasing funds available for distribution to charities.

  • The requirements to identify donors and provide acknowledgements remove donor privacy protection and could reduce willingness to donate.

  • Disallowing foundation manager salary and other expenses as administration expenses if the foundation manager is a family member unfairly penalizes family members who work for foundations.

 
While this post covers the main points of the ACE Act, this bill contains additional rules for DAFs and private foundations. Remember that the ACE Act is just a proposal right now and this bill must still work through the legislative process to become enacted. In its current state, the bill makes certain sections effective upon enactment and others effective after December 31, 2021. If you have questions about the ACE Act, your charitable planning or charitable entities, contact your Warner attorney or Jennifer Remondino at jremondino@wnj.com or at 616.396.3243.

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