On June 9, Representatives Angus King and Chuck Grassley introduced S. 1981, the Accelerate Charitable Efforts (ACE) Act, in the Senate in an attempt to regulate donor-advised funds and private foundations. There is no companion bill in the House as of yet, and the Senate bill does not yet have any cosponsors.
The support for this bill primarily comes from The Initiative to Accelerate Charitable Giving. The premise for needed reforms is the concept that the $1 trillion in private foundations and $120 billion in DAFs in the United States is not being paid out to charitable organizations swiftly enough. The act aims to close loopholes for private foundations and enact regulations that would increase payouts of DAFs.
Unlike other bills and ideas that have been brought up in this area, this act separates the DAFs sponsored by community foundations and those sponsored by private foundations and treats them differently.
If you have any questions, want to discuss, or have any information you’ve learned, please contact Rhiannon McAfee at [email protected] or 858-829-5628.
Key definitions used:
Qualified Donor-Advised Fund (QDAF)
The act defines a “Qualified DAF” (QDAF) as a DAF (including a non-geographically limited DAF) that imposes a 15-year limitation on advisory privileges for donor as measured from the contribution date. Contributions to QDAFs must designate a charitable recipient to receive the remaining assets undistributed at the end of the 15-year time limit. If a QDAF does not pay out within 15 years, the sponsoring organization must pay a penalty tax of 50% of the undistributed amount.
Non-Qualified Donor-Advised Fund (QDAF)
The act defines a “Non-Qualified DAF” (NQDAF) as a DAF that does not impose the 15-year limitation.
Qualified Community Foundation (QCF)
The bill defines a QCF as a 501(c)(3) organization whose purpose is to understand and serve the needs of a geographic community that is no larger than four states and which has at least 25% of its assets held outside of DAFs.
Qualified Community Foundation Donor-Advised Fund (QCFDAF)
The bill defines a QCFDAF as a DAF sponsored by a QCF that limits donor advisory privileges to DAFs with an aggregate value of $1 million or less (as adjusted for inflation). Alternately, if a fund has more than $1 million in aggregate, it can still be considered a QCFDAF if it has a contractual obligation to pay out 5% or more per year or if donations are distributed within 15 years of contribution.
Non-Qualified Community Foundation Donor-Advised Fund (NQCFDAF)
The bill defines an NQCFDAF as a DAF sponsored by a QCF does not meet the requirements to be a QCFDAF.
The below regulations relating to contributions will only apply to contributions made to DAFs after the enactment of the bill. All contributions made before bill enactment will be treated as they are currently.
Qualified Community Foundation Donor-Advised Fund (QCFDAF) & Qualified Donor-Advised Fund (QDAF)
Donors may not claim an income tax deduction for gifts of non-publicly traded assets to QCFDAFs and QDAFs until the asset has been sold (but not distributed) by the DAF sponsor. The amount of the deduction is limited to the value credited to the DAF as a result of the sale.
Non-Qualified Community Foundation Donor-Advised Fund (NQCFDAF) & Non-Qualified Donor-Advised Fund (NQDAF)
- Donors may not claim an income tax deduction for gifts to NQCFDAFs or NQDAFs until it makes a qualifying distribution to another charitable organization (other than a DAF). The amount of the donor’s deduction is limited to the amount of the qualifying distribution out of the DAF.
- Donors may not claim an income tax deduction for gifts of property other than cash to NQCFDAFs and NQDAFs until the property has been sold, reduced to cash, and distributed to another charitable organization (other than a DAF).
Donors must obtain written acknowledgment from the sponsoring organization to claim a charitable deduction, and sponsoring organizations must report to the IRS the same information provided to donors with respect to gifts received. The bill is not clear how and through what means that reporting will happen.
Family foundations could not count administrative expenses paid to staff and board members who are also family members toward the minimum distribution requirement.
Distributions to DAFs
Private foundations could not count distributions to DAFs as qualifying distributions to their minimum distribution requirement (unless distributed by close of the first taxable year after the taxable year in which the contribution was received).
Eliminates Excise Tax on Certain Foundations
This bill would eliminate the 1.39% excise tax to a private foundation in any year in which the foundation distributes at least 7% of its net assets. It would also eliminate the 1.39% excise tax on any “limited duration foundation” (LDF) (defined as a foundation with a duration of less than 25 years under its governing documents). An LDF may not make any distributions to a “Disqualified Private Foundation” (DPF) (defined as any private foundation that has disqualified persons* in common with the LDF). In any year an LDF no longer qualifies as an LDF, it will be subject to a recapture tax equal to any tax benefits that the LDF previously received.
*A disqualified person is defined in IRS tax code as an individual who is—
- (i) a substantial contributor to the foundation,
- (ii) an owner of more than 20 percent of—
- (I)the total combined voting power of a corporation,
- (II)the profits interest of a partnership, or
- (III)the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation, or
- (iii) a member of the family of any individual described in clause (i) or (ii).
Unless the sponsoring organization of a DAF identifies the individual DAF donor, a charity will not be able to treat it as support from a public charity. All anonymous distributions from DAFs held by a sponsoring organization will be treated as though they are from a single source. Distributions from DAFs that are identified to a particular donor will be counted as support received from that individual donor.
Proposed CA State Legislation
In the 2019-2020 legislative session, Assemblymember Wicks (AD-15) authored AB 1712 regarding DAFs. AB 1712 did not pass, and she introduced new legislation in the 2020-2021 session as AB 1353. AB 1353 does not currently have any language in it. AB 1712 would not have made the substantive changes seen in the ACE Act but would have imposed new reporting requirements for DAFs for the purposes of “helping the Attorney General ascertain whether those funds or accounts are being properly administered.”
The reporting would have included (at a minimum):
- Policies on dormant and inactive DAFs and those that do not make distributions for a specified time not to exceed 36 months—including how the sponsoring organization tracks and enforces compliance (or a statement that the sponsoring organization does not have any such policy)
- Value for most recent accounting period of the value of the assets invested by the sponsoring organization that were invested in mutual funds, exchange traded funds, or other investment vehicles or entities controlled by, controlling, or under common control with an entity that provides administrative or investment services to the DAF sponsoring organization
The bill noted that the information reported should not include personal information about the donors.
DAFs would have been exempt from the reporting if any of the following applied:
- The sponsoring organization held less than $3M in total DAF assets;
- The sponsoring organization granted out more than 50% of the aggregate value of total assets across all DAFs;
- The sponsoring organization granted more than 90 percent of distributed funds to serve a geographically defined community smaller than a state; or
- Of the sponsor’s total distributed grants, more than 90 percent were issued to serve a geographically defined community smaller than a state.
Penalties for not reporting or reporting fraudulently could include fines up to $10,000 and suspension of registration of the sponsoring organization.