Senators Angus King (I-Maine) and Charles Grassley (R-Iowa) have introduced a bill called the Accelerating Charitable Efforts Act (ACE Act) that, if passed, would impact the timeline on Donor Advised Fund (DAF) gifts. DAFs are giving accounts established to provide donors with a tax-efficient and flexible way to maximize the benefits of their charitable donations for the recipients and for themselves.
Currently, donors can make a gift to a DAF and take an immediate tax deduction based on the gift’s value at the time of the gift. This gift can remain in the DAF until the advisor of the fund – typically the donor – requests that a grant from the fund be made to a qualified charity. It is common for DAF managers to encourage advisors to make grants each year that meet or exceed 5% of the fund’s value, but there is no requirement under the current law that creates a deadline by which the DAF funds must be distributed to one or more qualified charities.
The proposed ACE Act could change these grantmaking rules. The Act would establish two new categories of DAFs: a 15-year DAF and a 50-year DAF[1]. 15-year DAFs would provide the donor with the same immediate tax benefit, but the value of that gift would need to be distributed to one or more qualified charities within a 15-year window. The 50-year DAF would allow the donor a longer window for distribution of the gift, but the tax deduction would not be realized until the gifts are made from the DAF to one or more qualified charities. This 50-year DAF option would still require the value of each gift to be distributed within a 50-year window.
Under the proposed ACE Act, donors would also be allowed to hold up to $1 million in a DAF at a community foundation without any payout deadlines, but the Act would restrict the size of the community foundation that would be permitted to operate these types of DAFs.
It is estimated that about $140 billion is currently sitting in DAFs[2], awaiting distribution, and this bill is aimed at accelerating the distribution of those assets from the DAFs to charities. However, the new Act, if passed, would only apply to donations made to DAFs after its enactment. Gifts in DAFs prior to the enactment of the proposed law would be grandfathered – not subject to the payout deadlines in the ACE Act[3].
As of the publication of this article, the proposed bill still has several hurdles to clear before it could become law, and it is not without its detractors and proponents within the philanthropic space[4]. Some industry experts believe that while the bill is unlikely to be passed this year, it will remain on legislators’ radar for years to come[5]. We will continue to monitor its progress.
For more information about DAFs or to speak with a local Covenant Trust representative about an investment strategy that is right for you, reach out to us by email or phone at 800-483-2177.
The information provided is general in nature, educational and is not intended as either tax or legal advice. Consult your personal tax and/or legal advisor for specific information. Covenant Trust is incorporated in the State of Illinois and is supervised by the Illinois Department of Financial and Professional Regulation. Covenant Trust accounts are not federally insured by any government agency. Clients may lose principal as a result of investment losses.
[1] https://www.king.senate.gov/imo/media/doc/ace_act.pdf
[3] https://www.jdsupra.com/legalnews/accelerating-charitable-efforts-act-8743683/
[5] https://www.thenonprofittimes.com/regulation/federal-legislation-likely-will-impact-giving/