Accelerating Charitable Efforts Act legislation gains traction in the House and may change the landscape for private foundations and donor-advised funds.
Major legislation affecting charitable giving, known as Accelerating Charitable Efforts Act (ACE Act), was introduced in the U.S. Senate in June 2021 by Senators Angus King (I-ME) and Chuck Grassley (R-IA). The bill contains some of the most sweeping reform for private foundations and donor-advised funds (DAFs) since the 1969 Pension Protection Act. It is considered bipartisan since Senator King caucuses with the democrats; however, we have not yet seen other Senators showing support for the bill.
This past February, Representatives Chellie Pingree (D-ME) and Tom Reed (R-NY) introduced a companion bill in the U.S. House of Representatives. This bill is very similar to that introduced into the Senate last year and has the support of two other House Democrats from California, Ro Khanna and Katie Porter.
It is likely the bill will face much debate. In fact, six Republicans and five Democrats of the Ways and Means Committee recently sent a letter to House colleagues expressing concern about the regulation of donor-advised funds. At this stage, the final form of the legislation is unclear; we cannot predict if it will be passed by both chambers of Congress, and whether President Biden will support its enactment. One thing is clear, reform for charitable giving is gaining traction and attention.
This may be due to the lack of any major reform in over 50 years. The impacts of the pandemic on low-income and minority populations may be a contributing factor, as we continue to see that the demand for relief efforts, food, medical, and other humanitarian programs far exceeds the supply of available resources. The tremendous growth in assets of both charitable giving vehicles may also play into this. By some estimates, the over 90,000 private foundations in the US,1 hold assets greater than $1 trillion.2 DAFs held assets just under $160 billion in 2020, representing an increase of almost 10% when compared to the prior year.3
Whatever the reason, reform appears to be inevitable. The current provisions proffered by the ACE Act affect private foundations, DAFs, the public support test rules for public charities in respect of DAF donations and contemporaneous acknowledgment requirements. The focus here will be limited to some of the provisions that we believe are most relevant to private foundations and DAFs.
The ACE Act4
The ACE Act includes three provisions germane to private foundations. The first relates to administrative expenses paid to disqualified persons, who are in part defined as substantial contributors, foundation managers (e.g., directors and officers), owners of more than 20% of organizations that are substantial contributors and family members of each of these. The administrative expenses, including salary and travel expense, will no longer be treated as qualifying distributions. In other words, those expenses can be paid to disqualified persons; however, they will not count towards the private foundation minimum distribution requirement.
The bill does provide for an exception for foundation managers that are not family members of a substantial contributor or owner of more than 20% of organizations that are substantial contributors. Administrative expenses paid to those individuals will still count towards the private foundation minimum distribution requirement.
Distributions made to a DAF
The second private foundation provision relates to distributions made to a DAF. These will no longer count towards the private foundation minimum distribution requirement. In addition, if any such distributions are made to a DAF, the amount, the name of the DAF and any donation advice given to the DAF must be reported by the private foundation to the IRS.
The excise tax
The third private foundation provision relates to the exemptions from the 1.39% excise tax on net investment income.5 Private foundations that make qualifying distributions of at least 7% of its net assets would be exempt from the excise tax. The current payout rate is 5%, although many private foundations give in excess of this floor.
For newly formed private foundations, if, from the time the foundation is established the governing documents provide for the foundation’s term to be no more than 25 years, the foundation would be exempt from the excise tax during its lifetime as long as the foundation does not make distributions to another private foundation in which a disqualified person is associated with both foundations.
The effective date for the above private foundation provisions apply to taxable years beginning after the date of enactment.
Overall, the provisions proffered by the ACE Act with respect to DAFs provide for some new definitions of community foundations and new classification of DAFs. The timing of the deductibility of the donation is dependent on the type of asset donated and the classification of the DAF. It appears that the classification must be tracked at the DAF account level rather than at the DAF organizational level.
Qualified and nonqualified DAFs
Qualified DAFs would limit the advisory privileges of the donor to 15 years from the date of the contribution. The donor would be allowed the deduction for the contribution of cash or publicly traded assets in the year of the contribution and in the amount contributed. For donations of non-publicly traded assets, donors would not be entitled to the deduction until the DAF sells the contributed asset and the amount of the deduction is limited to the value credited to the DAF as a result of the sale, net of fees. In addition, if the Qualified DAF failed to distribute the assets inclusive of investment earnings, within the 15 years, it would be subject to a 50% penalty on the amount not distributed.
Nonqualified DAFs would be subject to a 50-year limitation on advisory privileges with the same 50% penalty for amounts not distributed in that timeframe. The donor would not receive the tax deduction for cash, publicly traded securities, or non-publicly traded asset donations to the Nonqualified DAF until the funds are subsequently distributed to qualified public charities. The tax deduction is limited to the amount of the qualifying distribution with the oldest contributions to the DAF being considered the first to be distributed (i.e., first in, first out).
The effective date would apply to donations made after the date of enactment; any donations made prior to that date would be grandfathered and not subject to the provisions of the bill.
As its name suggests, the ACE Act is intended to accelerate charitable giving, but ironically, it may have the opposite effect in the long run. In the short-term, however, gifts to DAFs may increase, as donors may want to take advantage of existing tax benefits offered for donations to public charities such as DAFs. Typically, any charitable tax deduction in excess of the annual limits imposed by the Internal Revenue Code can be carried forward for up to 5 years. Donors may consider ‘bunching’ donations to the DAF prior to the enactment to take advantage of the current rules.6
Much more debate and updates around reform for charitable giving to follow.