Senators King and Grassley have introduced S. 1981 which would impose new rules and mandates on popular charitable vehicles like donor-advised funds (DAFs). While we have covered what is in this legislation and have taken a closer look at the tax implications for charities and the causes they support, there is another element of the bill that warrants further discussion. The administrative nightmare this proposal would impose on DAF sponsors, themselves public charities, cannot be ignored.
Recordkeeping Burden: Following Each Dollar Over Time
As we have outlined here before, the bill would essentially divide DAFs into two categories: Qualified DAFs with a 15-year payout window, and nonqualified DAFs with a 50-year payout window. Charitable funds within a DAF that are not paid out within these arbitrary windows are subject to a confiscatory 50% tax.
What is not spelled out in the bill is the enormous administrative burden these requirements impose on the DAF sponsoring organizations. These are the 501(c)(3) charitable organizations that facilitate giving by housing the charitable savings accounts, providing information and research for donors and distributing the DAF funds to other charities as recommended by the donors. While some DAF sponsors are charitable arms of for-profit institutions, they are themselves nonprofit charitable organizations.
That’s why it is so concerning to think through what they would have to comply with under this proposal. Let’s take the example of a 15-year DAF. If S. 1981 were enacted, the sponsoring organization would have to implement new overhead systems to track every dollar put into a DAF to make sure each dollar is paid out within 15 years of when that dollar is put into the DAF. Not only that, but the sponsor must also track the related appreciation for each donation and ensure that is paid out within 15 years. Keeping in mind that a donor may contribute into their DAF throughout the year and distribute funds out to charities throughout the year, this tracking alone is an onerous burden.
While this may be expensive for large sponsors, it would be an even steeper burden for smaller sponsoring organizations. Either way, it will result in higher administrative expenses and fees for donors. Higher fees mean fewer dollars for charities. This runs absolutely counter to the goal of getting more resources into the hands of charities and the communities they serve.
Community Foundations not Exempt from Overhead
The bill does include a weak and complicated exemption for some community foundations, common DAF sponsors. However, to escape the burden outlined in the section above, a qualified community foundation would have its own increased compliance hurdles. For example, to fit the exemption as a qualified community foundation, an organization must prove they hold at least 25% of their assets outside of DAFs. Even more of a hardship: it would also have to track each individual with a DAF to ensure that individual does not have DAFs that aggregate to over $1 million or that they are not paying out at least 5% of the DAFs’ value annually.
These new administrative burdens would impose higher costs on community foundations – siphoning resources that would otherwise be put to use making a difference in their communities.
Other Burdens Throughout Legislation
This is only the tip of the iceberg when it comes to the administrative burdens that would be imposed by S. 1981. Part of the reason DAFs are so popular is the ease with which donors may contribute complex or non-cash assets to charity. The multi-faceted and complicated rules this measure would impose for these donations involve forcing the assets’ sale before deductions can be taken and requiring a web of written “acknowledgments” from the sponsoring organization to the donor and to the IRS. In the case of community foundations, Jeff Hamond explained in a recent Chronicle of Philanthropy piece that the rules would put community foundations at a disadvantage:
“Community foundations are often the only charity in a region with the expertise to accept gifts of real estate, closely-held stock, or other assets. It’s a critical part of the value they provide local donors, who rely on community foundations to help them easily liquidate such assets and make contributions to local charities through their DAF. But the legislation would change the rules around such gifts for DAFs, while leaving current law in place for other charities. This action would make donors far less willing to use community foundation DAFs for these gifts and more likely to take their giving to other large charities that can process them.”
Public charities would have to jump through new hoops when they receive anonymous DAF contributions under the proposed requirement that all such donations be treated as coming from one person. This burden would make it more difficult to meet the public support test.
Private foundations would be required to report new information on their DAF gifts to the IRS – another hurdle, given the donor privacy implications of this kind of disclosure. Even the prohibition on private foundations counting the salaries and expenses of family members toward payout is an unnecessary administrative headache. Separating out expenses based on familial relationships is just another cost that will detract from the resources used for the causes Americans care about, without any valid justification.
With no evidence that this bill would increase the resources for charities, there is no reason to impose a slate of administrative burdens on the charities and their supporters. We all share the goal of encouraging and fostering charitable giving. It is clear to many that S. 1981 and its administrative nightmare would not help accomplish that goal.