Written by David Wheeler Newman
The “Accelerating Charitable Efforts Act”, or the “ACE Act”, introduced on June 9th by Senators Grassley and King, would have major impacts on donor advised funds (DAFs) and private foundations. Our prior post discussed the proposed changes to the private foundation rules, and this post will discuss those affecting DAFs.
Under existing law, a donor may generally claim a charitable income tax deduction for the tax year in which a contribution to a DAF is made, and later make recommendations to the DAF sponsor for distributions to be made from the DAF to other public charities. The proposed legislation would establish three new categories of DAFs, each with its own rules concerning the deductibility of contributions.
A Qualified DAF would be created with a fund agreement providing that advisory privileges to recommend distributions to charities with respect to any contribution would end before the last day of the 14th tax year beginning after the year in which the contribution is made. Contributions to a Qualified DAF would be deductible only if the donor identifies a charity to receive any balance of the contribution (and any accrued earnings) at the end of that period. For contributions other than cash or marketable securities, no deduction would be allowed until the DAF sponsor sells the contributed assets, and the amount of the deduction would be limited to the proceeds of sale received by the DAF sponsor and credited to the Qualified DAF account.
The DAF sponsor would be subject to a 50% excise tax on any portion of a contribution to a Qualified DAF, and accrued earnings, that has not been distributed at the end of that same period. These rules would effectively limit the term of Qualified DAFs to 15 years.
The ACE Act would impose expanded requirements for the contemporaneous written acknowledgement (CWA) to be issued to the donor by the DAF sponsor, to enable the donor to substantiate the charitable income tax deduction. The CWA for a contribution of assets other than cash or marketable securities would need to report the proceeds of sale of the assets and notify the donor that the allowable deduction is limited to proceeds credited to the DAF account.
Qualified Community Foundation DAFs
The second DAF category that would be created by the ACE Act would be the Qualified Community Foundation DAF (QCFDAF). These DAFs would be created at a Qualified Community Foundation, organized and operated to serve the needs of a particular geographic community no larger than four states. The definition would therefore exclude community foundations serving faith communities not confined to a geographic area, as well as other DAF sponsors including universities and environmental organizations. At least 25% of the assets of a Qualified Community Foundation would need to consist of assets other than DAF assets.
A QCFDAF would either need to hold less than $1 Million in assets (aggregated with other DAF accounts at the Qualified Community Foundation over which the same person has advisory privileges) or would be governed by a fund agreement requiring the DAF to distribute at least 5% of its assets annually.
As with the Qualified DAF, no deduction would be allowed for a contribution to a QCFDAF of assets other than cash or marketable securities until those assets are sold by the DAF sponsor, with the Qualified Community Foundation subject to the same expanded requirements for the CWA.
The third DAF category under the proposed ACE Act would be the Nonqualified DAF, which is any DAF that is not a Qualified DAF or a QCFDAF.
No charitable income tax deduction would be allowed for a contribution to a Nonqualified DAF until the DAF sponsor makes a distribution to charity from that contribution, and the deduction is limited to the amount of the distribution. Distributions from a Nonqualified DAF would be treated as made from contributions using first-in/first-out accounting.
The DAF sponsor would be subject to a 50% excise tax on the amount of any Nonqualified DAF that is not fully distributed within 50 years – essentially meaning that all Nonqualified DAFs would be limited to a term of 50 years. Finally, sponsors of Nonqualified DAFs would be subject to more complex CWA requirements.
Finally, sponsors of Nonqualified DAFs would be subject to more complex CWA requirements.
The Public Support Test
Most charitable organizations, to be classified for tax purposes as public charities, must meet the public support test. In general, that test requires that at least one-third of an organization’s support must come from the general public (as opposed to one individual or family). Contributions from an individual are counted in this calculation to the extent they do not exceed 2% of the organization’s total support. But the entire amount of grants to the charitable organization from another public charity may be counted – they are not subject to the 2% limitation.
The ACE Act would subject grants from a DAF sponsor to a charitable organization to the 2% limitation. Moreover, if the DAF is identified with a donor to the organization calculating its public support, the DAF grant to the organization would be combined with contributions to the organization by that donor, subject to a single 2% limitation on the amount that could be counted toward the public support determination.
Illustration: The Social Service Agency has secured its tax-exempt status as a charitable organization under IRC Section 501(c)(3), but since it has relied on contributions from only a few families, it may be difficult for the Agency to meet the public support test. One of its donors, Mr. Smith, has already contributed more than 2% of the Agency’s total support. Mr. Smith maintains a DAF, the Smith Family Fund, with a DAF sponsor. Under current law, if the DAF makes a grant to the Agency, the entire amount of the grant is counted toward the Agency’s public support test, because the grant is coming from another public charity – the DAF sponsor. The ACE Act provision would aggregate grants from the Smith Family Fund with contributions by Mr. Smith, within a single 2% limitation, meaning that none of the DAF grant funds may be counted toward the Agency’s public support test.
If the ACE Act becomes law, it would generally be effective as of January 1, 2022.