Proposed federal legislation, S. 1981, covered here before, poses several threats to charitable giving. Much of the debate has centered around mandating donor-advised fund payouts within a specific time frame. The legislation would require DAFs to pay out within 15 years if a donor wishes to claim the charitable tax deduction. But little has been said about the proposed penalty for funds that do not pay out within 15 years (or 50 for those not claiming the deduction).
The legislation would impose a confiscatory 50 percent tax on the charitable resources within a DAF that have not been paid out in the arbitrary time frame. This penalty would endanger charitable resources, which are part of the backbone of civil society.
Let’s review three DAF basics:
- Every dollar a donor contributes into a fund is irrevocably committed to charitable giving. The donor no longer controls that dollar. Rather, the sponsoring organization controls that dollar and may only distribute the funds to qualified 501 (c)(3) organizations, upon advice of the donor and within the rules of the sponsoring organization. The donor may not ever take out the funds to use them for personal consumption. Fund assets are charitable assets.
- A donor may claim an immediate charitable tax deduction for contributions because he or she may no longer use these funds as income or hold them as property. This is the intention of the charitable deduction – we do not tax funds that are committed to charity and no longer usable as income or property.
- Donors may have many reasons to not distribute their contributions to charities within 15 years. A donor may wish to save charitable assets in their busy working years then distribute them thoughtfully and strategically in retirement. A donor may have a specific goal in mind for a large gift to charity such as a new firetruck for a community or a science lab for a local school. With the benefit of time, a donor may see the charitable savings grow and appreciate to facilitate such a gift. Alternatively, a donor may use a fund to smooth giving over time or to respond quickly in times of crisis, as many did during the 2008-2009 recession and, notably, during the COVID-19 crisis. A donor may use a fund over the long term to instill a legacy of giving in his or her children, supporting the next generation of givers. Immediate payout is not always the most beneficial choice for the charities or the communities they serve.
S. 1981 disregards these basic facts. Instead, it posits that the government has a right to take half of the charitable assets destined for 501(c)(3) charities if not distributed within a given time frame. It seeks to take half of the assets from sponsoring organizations, themselves public charities. Those funds would cease to be available for charitable purposes, to the detriment of civil society.
As the Philanthropy Roundtable’s CEO Elise Westhoff wrote in a 2020 Wall Street Journal piece, “The current system of philanthropic freedom enables Americans of all backgrounds, beliefs and bank-account sizes to support worthy causes and benefit their communities and the country. That system should be preserved and expanded, not controlled and shrunk by a powerful few.” Yet that is exactly what S. 1981 would do. Charitable funds are not – and should never be – government property.