Charitable support is a key funding stream for nonprofit organizations that provide essential community services in the U.S. There is an estimated $140 billion currently held in assets of Donor Advised Funds (DAF), a charitable giving vehicle set up by individual donors and/or private foundations, yet sponsored and administered by commercial financial service providers (who manage 60 percent of DAF assets nationally), community foundations (who manage 30 percent DAF assets nationally), and single-issue charities (who manage 10 percent of DAF assets nationally). While DAFs provided $39 billion of charitable support to nonprofits in 2019, it's unclear who benefitted, who paid out, and how nonprofit fundraisers can equitably access these funds.
Philanthropic reform is needed in order to address the incomplete oversight of DAFs that benefits wealthy donors at the expense of charities and the communities they support. The Accelerating Charitable Efforts (ACE) Act , recently introduced in Congress, is a package of steps to bring about this reform.
Sign your organization or yourself as an individual onto a statement of support for the ACE Act!
An increasing share of charitable dollars from individuals is going away from nonprofits and into DAFs; as of 2019 contributions into DAFs equaled nearly 13 percent of all individual giving. These dollars are tax exempt for the use of public good, and yet there is a lack of transparency and accountability around how these dollars get used and by when.
DAFs currently have no time requirement and are not subject to the same reporting and payout requirements as private foundations, though are often used by private foundations. An increasing share of charitable dollars from private foundations are also going to DAFs: an estimated $3 billion of private foundation grant funding went to the top five commercial sponsors of DAFs between 2010 and 2018.
When DAFs are used by private foundations, the payout and reporting requirements for private foundations are rendered useless, as a private foundation-to-DAF transfer fulfills the payout and reporting requirements in itself. These requirements, imposed by the Tax Reform Act of 1969, are intended to ensure a public good will follow an immediate tax break. Private foundation-to-DAF transfers leave no opportunity for the Attorney General to monitor the funds to ensure they are in compliance with any trust restrictions on their funding.
There is no requirement that funds put into a DAF ever go to a working charity. $142 billion in funds are sitting in DAFs as of 2019 with no requirement or incentive to be spent. Donors of these funds have already received a tax incentive and have no more monetary incentive to get the dollars to working charities.
Private foundations are required to pay out at least 5 percent of their corpus each year, but that payout includes expenses other than grants to working charities. Expenses that count towards the payout rate include transferring funds to other DAFs and also travel expenses for family members on the foundation’s board. This means that sometimes much less than five percent of a foundation’s assets are distributed to working charities each year.
Introduced by Senators Grassley (R) and Angus (I), the ACE Act is bipartisan federal legislation that seeks to reform tax laws that cover charitable donations, specifically focusing on reporting and payout rules for Donor Advised Funds. Existing DAFs will not be subject to these changes.
The ACE ACT would amend the Internal Revenue Code by mandating a private foundation to include in its annual return the amount of any contribution to a sponsoring organization, the sponsoring organization to which such contribution was made, and the donation advice given to such organization.
This reform would allow state Attorneys General offices access to the necessary information to monitor and regulate DAFs and enforce flexible payout requirements.
Community foundations are not subject to the payout and reporting requirements if they hold less than $1 million in DAF funds. Currently, community foundations sponsor less than 30 percent of all DAF assets nationwide.
The ACE Act will replace the existing DAF structure with 15-year DAFs and 50-year DAFs. 15-year DAFs will allow for immediate tax benefits, but only if DAF funds are distributed within 15 years of the donation. As an alternative, donors are allowed more flexibility with the 50-year DAFs. With a 50-year DAF, the donor will still receive capital gains and estate tax benefits but will not receive an income tax deduction until the funds are distributed to a charity.
The payout requirement will not be met for private foundations through DAF transfers or family member travel expenses and salaries.
Why does this matter to nonprofits?
The ACE Act is one step closer to desperately needed philanthropic reform. With DAFs evading transparency and accountability requirements, the current system benefits wealthy, predominately white, donors. In turn, nonprofits seeking to serve communities of color await anticipated funds. It is critical we acknowledge the current system is broken, and it is predominately white, wealthy donors benefiting from the lack of regulation.
What can you do?
Contact your senator today and encourage them to support S. 1981 -- ACE Act.
For more information, please contact Marie Ellis, MCN public policy director, at 651-757-3060 or email@example.com.