Donor-advised funds have been of debate within state and federal politics for many years, with various attempts to regulate donor-advised funds (DAFs) to increase their transparency, accountability, and spend down policy. A new attempt to change the policy around DAFs is currently being routed through the United States Senate. Under the proposed Accelerating Charitable Investments (ACE) Act, DAFs would either be allowed to be maintained for 15-years or 50-years. Presently, DAFs can be passed from generation to generation with no requirement that they are spent out over a period of time, or even that a percentage of funds be distributed—unlike the requirement for private foundations to distribute 5% annually.
Under this proposed Act, community foundations would be exempt from certain provisions which would allow them to continue funding their work in their service regions; however, the Community Foundation Public Awareness Initiative recently issued a statement mentioning “proposals to place restrictions on DAFs – including the latest legislation proposed by Sen. Angus King and Sen. Charles Grassley – are solutions in search of problems.”
Historically, DAFs were a bread-and-butter service of community foundations, with many donor-advised funds being established by wealthy individuals in lieu of creating a private foundation of their own. Nationally, many community foundations are sustainable because of the investment and management fees they charge to DAFs, meaning that they could sustain operations for other programs such as nonprofit capacity building, community leadership activities, and other community initiatives. A spend-down policy for DAFs could result in more dollars leaving fund sponsors, such as community foundations, but could also create sustainability issues with local philanthropic infrastructure organizations like community foundations.
Much of the debate around DAFs is the result of wealthy individuals funneling money from location to location. In theory, a business owner can place some of their own company’s stock within a DAF and receive a tax deduction for their generous contribution. In some cases, DAF donors may inflate the price of the stock and receive a significant tax deduction, but when it comes time to distribute funds, the stock value may be significantly less in actual dollars.
Presently, it appears that many national organizations have been excluded from conversations surrounding DAF reform, with the Community Foundation Public Awareness Initiative urging lawmakers to consider policy changes based on the following criteria: “(1) supported by data, (2) address real problems, (3) do not significantly increase administrative costs for smaller DAF sponsors (e.g., community foundations in small towns and rural areas, many of which manage charitable assets under $20 million), (4) do not artificially restrict our ability to address problems in our communities.”
The United Philanthropy Forum has issued a letter from many philanthropy service organizations around the country calling for the philanthropic sector to be included in these discussions on policy reform. While many proposals to reform charitable giving have failed in the past, proposed donor-advised fund legislation has increasingly been brought to the forefront of policymaking around the nonprofit sector.
Unfortunately, there still appears to be a lack of overwhelming evidence to support the reform of DAFs—one way or the other. While regulation around DAFs is necessary, as a result of many nonprofit and for-profit entities now managing them, there is one thing that is certain – these debates around regulation will continue.
