A bipartisan bill, the Accelerating Charitable Efforts (ACE) Act, proposes time frames for donor-advised fund (DAF) distributions to ensure money in DAFs makes its way to charitable organizations.
The bill, introduced in Congress on June 9, 2021, also sets new rules for private foundations, exempting those that meet payout requirements from the excise tax on net investment income. It would become law if it passes the House of Representatives and the Senate and is signed by the president.
Currently, donors can make contributions to a DAF and receive the charitable contribution benefit on their income tax return. However, there aren’t any requirements for when—or if—these funds are distributed to charitable organizations.
New Types of DAFs Introduced by the ACE Act
The ACE Act would establish two types of DAFs to replace existing DAF rules.
These DAF types are 15-year DAFs, also known as qualified DAFs, and 50-year DAFs, also known as nonqualified DAFs.
15-year DAFs, or Qualified DAFs
Under this type of DAF, donors would get an up-front charitable deduction for their contributions to a DAF if either the following conditions are met within 15 years of the donation:
- The funds in the DAF are distributed
- Advisory privileges for donors are released
For complex assets donated to DAFs, such as closely held stock, the income tax deduction would equal the cash made available to the DAF after the sale of the asset, rather than the appraised value of the asset.
50-year DAFs, or Nonqualified DAFs
With this alternative, donors to DAFs wouldn’t receive a charitable contribution deduction on their income tax returns until the donated funds are distributed. All funds would have to be distributed within 50 years of the initial donation.
No deduction would be allowed for noncash contributions unless the sponsoring organization sells the donated property for cash.
Proposed DAF Guidance Changes
If contributions aren’t made out of a DAF within the 15-year or 50-year periods, an excise tax of 50% of the undistributed amount, along with any earnings attributed to it, would be imposed on the sponsoring organization of the DAF.
Community Foundation DAFs
Some exceptions apply to DAFs set up with community foundations. The ACE Act proposes that donors would be able to establish a DAF of up to $1 million at a qualified community foundation without being subject to the payout rules.
For DAFs over $1 million, the legislation would still let donors receive the up-front charitable deduction, as long as:
- The DAF requires an annual 5% payout, or
- Donations are distributed within 15 years
Beginning after 2021, the $1 million threshold would be increased annually by a cost-of-living adjustment.
Donor Acknowledgment Letter Requirements
Donor acknowledgment letters are generally required for a donor to take a tax deduction for contributions. The information is usually included in a donor acknowledgment letter from the sponsoring organization.
The legislation expands the information donors must obtain and includes a new requirement for the sponsoring organization to provide this information to the secretary.
Effect on the Public Support Test
For public charities’ public support tests, amounts received from DAFs wouldn’t be treated as support from a public charity. Instead, they would be considered support received from one person.
If support from a DAF is identified to a specific donor, that support would be treated as provided by that donor for the public support test.
Potential Tax Changes for Private Foundations
The ACE Act would revise several rules for private foundations effective for taxable years beginning after December 31, 2021:
- Administrative expenses. Any administrative expense paid to disqualified persons of a private foundation wouldn’t count as a qualifying distribution. Disqualified persons wouldn’t include foundation managers who aren’t related to other disqualified persons.
- Distribution obligations. Private foundations couldn’t meet their distribution obligations through grants to a DAF unless the DAF makes a qualifying distribution in the same year.
Excise Tax on Investment Income
The ACT provides two ways a private foundation can avoid excise tax on net investment income:
- The private foundation makes qualifying distributions of 7% or more of its noncharitable-use assets during the taxable year.
- The private foundation is a limited duration private foundation, meaning that from its establishment, the foundation:
- Has a duration of no more than 25 years, and
- Makes no distributions to other private foundations that share a disqualified person, except for other limited-duration private foundations.
A recapture tax on the unpaid excise tax would apply if a private foundation fails to later meet these requirements.
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If you have questions about how the proposed legislation applies to your specific circumstances, please contact your Moss Adams professional.