Last week, Senators Angus King (I-ME) and Charles Grassley (R-IA) introduced a bill that would suppress charitable giving. The title of the bill, the Accelerating Charitable Efforts (ACE) Act, S. 1981, suggests the legislation will increase resources for charities, which is an admirable goal. However, the provisions within the bill would do the opposite—harming the exact charitable organizations and communities they seek to help.
As the Philanthropy Roundtable’s President and CEO Elise Westhoff said in her opposition to this bill, “History has shown that the voluntary nature of charitable giving is what has made it most effective in this country. When people have the flexibility to give how, when and where they choose, it spurs even more generosity and uplifts those who we all wish to help.”
Instead of preserving the tradition that has allowed charitable giving to address some of our nation’s most pressing challenges, the ACE Act would layer on additional mandates and regulations that would make it harder for Americans to support the causes and communities they care about. Private foundations, specifically family foundations, and donor-advised funds (DAFs) are the primary targets of this legislation—the latter being a common vehicle that has democratized giving and encouraged more people to engage in the important work of philanthropy.
DAFs are charitable giving accounts maintained by individual donor-advisors and oftentimes hosted by national sponsoring charities or community foundations. Every dollar that goes into a DAF is immediately and permanently committed to charitable giving. DAFs have grown in popularity over the last few years, distributing $25 billion to charities in 2019, a 93% increase since 2015.
During the COVID-19 pandemic, DAF donors voluntarily stepped up their giving to charities. According to a National Philanthropic Trust’s DAF COVID grantmaking survey, donors increased their grant amounts to charities by nearly 30% this past year from $6.41 billion in the first six months of 2019 to $8.32 billion in the first half of 2020. This growth rate is nearly double that of the prior six months, providing nearly $2 billion in additional funds for charities. One major concern with the proposed legislation is that it would remove some of the drivers of that growth—making DAFs less appealing to would-be donors.
The Roundtable takes issue with several concerning provisions in this complex piece of legislation:
Imposing a DAF Payout Requirement
As we have discussed here before, DAFs tend to pay out around 20% each year without any mandated requirement or timeline for doing so. This bill would impose a 15-year payout requirement on these charitable giving accounts. DAFs not meeting the payout would face a steep 50% tax on the contributions (and on any appreciation of those contributions) that have not been paid out after that time. In other words, the government will take half of funds that have been irrevocably committed to charitable giving if they are not paid out in this arbitrary time frame. Alternatively, a donor could delay the long-standing income tax deduction for charitable giving (a major incentive for charitable giving) and pay out over 50 years.
This payout requirement would limit the important ability for donors to allow their funds to grow over time and save up to make a larger charitable gift. Removing the timing flexibility that makes DAFs so popular would also come at a detriment to the charities they support, especially if the charity has long-term goals or future projects in need of support. At the same time, these requirements would impose a significant administrative burden on the sponsoring organizations that may lead to higher overhead costs for donors and, ultimately, less funds for charities.
Narrow Carve-out for Some Community Foundations
There is a carve-out for community foundations, which are common DAF sponsors. In order to meet the terms of this narrow exemption, a community foundation cannot have individual donors with DAFs that aggregate more than $1 million or the sponsored DAFs must pay out 5% of their value each calendar year. The community foundations themselves face a strict definition including that they serve a community no larger than four states and that that they hold at least 25% of their assets outside of DAFs.
The value of DAFs to community foundations is well established. What is less clear is why these lawmakers seek to restrain the tools used by community foundations to reach their charitable missions.
Private Foundations’ Use of DAFs
The bill further hampers charitable giving by prohibiting private foundations from counting DAF gifts toward their required 5% payout rate. This provision ignores the many valid and useful ways that private foundations may use DAFs to further their charitable missions including: to protect donor information when granting to a controversial cause; to issue a one-time, off-mission grant, such as COVID relief, without opening the door for further solicitations; and to pool resources with other givers, without burdening the receiving charity with extra administrative work.
Further, new reporting requirements on private foundations giving to DAFs would undermine some of the legitimate reasons that foundations may use DAFs as a giving vehicle. In our current divisive culture, donor privacy is crucial. Forced disclosure of some donations may threaten the safety and well-being of donors as well as chill charitable giving overall.
Public Support Test
When it comes to public charities, which must demonstrate broad support, DAF contributions are critical. Yet this bill would ignore the reasons that donors may want to remain anonymous, including for religious or modesty reasons, and would treat all anonymous DAF contributions received from sponsoring organizations as coming from one person—whether that’s the case or not. This change ignores the fact that sponsoring organizations are themselves IRS-designated public charities. It would also make it difficult for recipient charities to prove broad support with multiple, independent, anonymous DAF donations. We all share the goal of supporting charities and ensuring they have the resources necessary to achieve their missions for our communities. The last thing we need is to make it harder for these organizations to operate.
Handcuffing Complex Asset Gifts
In another confounding provision, the legislation mandates taxpayers could not claim a deduction for gifts to nonqualified DAFs (those that don’t pay out within 15 years) of complex assets before they are sold. There are ample real-world examples of donors giving non-cash assets, such as commercial real estate and operating businesses, to a DAF sponsor to provide ongoing charitable funding over an extended period of time. The Communities Foundation of Texas, for example, outlines several cases in which their donors were able to support their communities through the donation of such assets. Forcing a sale of such an asset at the time of donation is likely to yield less money for charities overall.
The bill also appears to disallow anonymous contributions of non-cash assets by requiring a formal acknowledgment that includes the name of the donor. Beyond the significant donor privacy concerns outlined above, the acknowledgment itself would impose new, unfounded compliance costs onto DAF sponsors—themselves public charities.
Family Foundations Under Fire
In another blow to charitable vehicles, the bill disallows family foundations from including salaries and expenses as administrative expenses, which discriminates against family members who work for foundations. Data show family foundations are not more likely to claim high administrative expenses than staff-run foundations. Why then treat working family members differently?
Unintended Consequences Must Be Considered
The legislation does include a “sweetener” to gain support among some in the charitable sector. This takes the shape of an exemption from the private foundation excise tax if a foundation pays out 7% of its assets or if it sunsets within 25 years without making distributions to related private foundations.
But overall, it is clear that a careful consideration of the unintended consequences is in order. As a whole, this bill would do more to punish the charitable sector, its donors and the causes and communities that Americans care about than it would to encourage an acceleration in charitable giving. Fostering and encouraging more charitable giving is a laudable goal—but this legislation is not the way to accomplish it.
The ACE Act is a solution in search of a problem. While one can understand the desire to provide immediate assistance to charities, the experience from the last year shows that many are already committing more dollars to charity in the wake of the pandemic. And, unfortunately, one cannot ignore that future crises will come to pass. We should be careful in our efforts to spend our precious resources now rather than ensure charitable dollars are available when inevitably philanthropy will once again need to step up.