Proposal to revise rules governing donor advised funds, new rules for private foundations

The Accelerating Charitable Efforts Act proposes major changes to the rules governing “donor advised funds” (DAFs) and private foundations.

Major changes to the rules governing “donor advised funds” (DAFs) and private foundations

Senators Chuck Grassley (R-IA) and Angus King (I-ME) last week introduced the Accelerating Charitable Efforts (“ACE”) Act [PDF 353 KB]—a bill proposing major changes to the rules governing “donor advised funds” (DAFs) and private foundations.

Under the proposed rules, if a DAF does not qualify as one of two new types of DAFs described in the ACE Act, a contribution to that “nonqualified DAF” would not be deductible as a charitable contribution until the nonqualified DAF distributes the amount of the contribution and, in the case of a contribution of a noncash asset, until the contributed asset is sold for cash. In addition, an excise tax would be imposed on a nonqualified DAF in an amount equal to 50% of any portion of a contribution not distributed in the first six months of the 50th tax year beginning after the tax year of the contribution.

The proposed rules affecting contributions to DAFs that qualify as one of the two new types of DAFs would be slightly less burdensome. In particular, a contribution of a non-publicly traded asset to a “qualified DAF” or a “qualified community foundation DAF” would not be deductible until the asset is sold, with the deduction being limited to the gross proceeds received from the sale and credited to the DAF. 

Qualified DAFs and qualified community foundation DAFs

For purposes of these proposed rules, a “qualified DAF” would be a DAF established under an agreement that requires the termination of a donor’s advisory privileges with respect to a contribution (and amounts earned on it) before the last day of the 14th tax year beginning after the tax year of the contribution. In addition, an excise tax would be imposed on a qualified DAF in an amount equal to 50% of any portion of the contribution not distributed by the last day of the sixth month following the end of the 14th tax year beginning after the tax year of the contribution.

A “qualified community foundation DAF” would be a DAF owned and controlled by a qualified community foundation and that either: (1) holds (together with any other DAF over which its individual donor-advisors have advisory privileges) assets with an aggregate value of no more than $1 million (as adjusted for inflation); or (2) is established under an agreement that requires it to make annual distributions in an amount equal to not less than 5% of the value of the DAF. A qualified community foundation would be a section 501(c)(3) organization organized and operated for the purpose of serving the needs of a particular geographic community that is no larger than four states and that holds at least 25% of its assets outside of DAFs.

New rules for private foundations

The ACE Act would provide that a private foundation’s distribution to a DAF would not be a qualifying distribution that counts towards the foundation’s mandatory payout. It would also provide that the foundation’s qualifying distributions would not include administrative expenses paid to the foundation’s “disqualified persons” (other than certain foundation managers who are not family members of substantial contributors to the foundation).

In addition, the ACE Act would lift the 1.39% excise tax that ordinarily applies to a private foundation’s net investment income for a private foundation: (1) in a tax year that the private foundation makes qualifying distributions during the tax year equal to 7% or more of assets; or (2) that, among other requirements, has a duration specified in its governing documents of not more than 25 years. 

New rules for publicly supported charities

Finally, the ACE Act would treat any contribution made to a public charity by a DAF as coming from either the DAF’s sponsoring organization, but treated as other than a public charity, or from the donor (if identified). In either case, this treatment would generally mean that the contribution from the DAF would not count in full as public support for purposes of the charitable recipient’s meeting a “public support test.” Similar rules were proposed by the IRS and Treasury Department in Notice 2017-73 [PDF 44 KB].

Proposed effective date

The proposed rules for contributions to DAFs—including those imposing a 50% excise tax for undistributed contributions to DAFs by a particular year—would be effective after the date of enactment of the ACE Act. The other proposed rules would be effective for tax years beginning after December 31, 2021.

If enacted, the ACE Act likely will not impact those funds—or potential recipients of those funds—currently held in DAFs.
 

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | +1 202 533 8817 | ruthmadrigal@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com

Carrie Garber Siegrist | +1 202 533 3056 | carriesiegrist@kpmg.com