Proposed DAF Changes Concern the Planned Giving Community

Proposed DAF Changes Concern the Planned Giving Community

Nov 01, 2021 Patrice Onwuka

Donor-advised funds (DAFs) are an essential tool in the philanthropic toolbox for donors planning their legacies. These philanthropic spending accounts appeal to donors engaged in succession and end-of-life planning for a number of reasons.

Donors give an irrevocable gift and take an immediate tax deduction, watch the gift grow over time and support the causes of their choice over the lifetime of the account, even after their passing. Some donors are converting their foundations to DAFs as a way of relieving administrative burdens and simplifying their tax filings. Donors can rest assured that nonprofits can depend on this stable and sustainable funding source even in lean times. By monitoring grantee organizations, entities hosting mission-driven funds can ensure they are in alignment with donors’ principles even after they are gone. 

DAFs pay out 20+% of their assets each year, far higher rates than private foundations, making them quite effective as a conduit to flow philanthropic dollars to nonprofits. It’s baffling, then, that federal lawmakers could blunt this planned giving tool. Many in the planned giving community are concerned that proposed changes to DAFs could undermine legacy giving specifically, as well as the freedom for donors to give how, where and when they choose. 

S. 1981, introduced by Sens. Angus King (I-ME) and Charles Grassley (R-IA), contains several provisions targeting DAFs. The legislation imposes an arbitrary 15-year payout requirement — and accounts that have not been paid out after that time would face a steep 50% excise tax on the remaining assets and any appreciation of those assets. Donors who want more than 15 years to distribute DAF funds — up to 50 years — would have to delay the income tax deduction until funds are distributed to charities.

These changes would create an onerous administrative tracking burden for DAF sponsoring organizations and increased costs for donors, undermining one of the reasons donors are converting foundations to DAFs. On top of tracking the inflows and disbursements donors make to DAFs throughout the year, sponsoring organizations would be required to track every dollar put into a 15-year DAF, along with appreciation, to ensure the entire account is paid out within that timeframe. For a 50-year account, the DAF sponsor would have to provide some sort of certification of every gift made in order for the donor to claim a tax deduction. Small DAF sponsors — many of them community foundations — would find these responsibilities burdensome and donors would certainly face higher administrative costs and fees. 

But when it comes to legacy giving, there are other troubling aspects of the King-Grassley bill.

First, it creates a time horizon on philanthropy. Many donors recognize that the problems they are working to solve are too complex to be solved over their lifetimes, much less in 15 years. DAFs allow donors to view problems from a longer time horizon and devote resources to problems beyond just those immediately in front of them. The King-Grassley bill forces philanthropists to use the money now to solve problems that may require long-term strategies.

Second, the bill undermines donor freedom. There should be room in philanthropy for short-term and long-term giving through a wide range of giving vehicles. Donors may want to see their gifts in action immediately, or they may be satisfied to know their gifts outlive them and can be used by successors to continue their legacy. The bill would remove this kind of diversity in giving. 

Proponents of these changes aim for only one end result: more dollars flowing to charities sooner. However, DAFs have evolved over time to be impressive nonprofit revenue sources for both short-term and long-term needs. The King-Grassley bill risks upending this kind of lasting support that allows grant recipients to plan for a longer time horizon. Let’s ensure donors are free to take a long view in solving society’s most pressing challenges and plan their charitable gifts accordingly.