A bill introduced in the House that would make significant changes to regulations for donor advised funds (DAFs) and private and community foundations, is under consideration. The bill is a companion to a Senate version that was introduced in June. 

We’re sharing the latest on what we know about the Accelerating Charitable Efforts (ACE) Act and key takeaways outlined by the Government Relations and Public Policy team.

The new bill, H.R. 6595, was introduced by Representatives Pingree (D-ME) and Reed (R-NY), along with Reps. Khanna (D-CA) and Porter (D-CA) in February.

As CMF reported, the ACE Act revises current laws that regulate the pace and transparency of resources flowing from private foundations and DAFs and establishes new rules for private foundations and community foundations and their respective DAFs specific to deduction eligibility, payout requirements and timelines.

If passed the legislation would:

•    Require private foundations to include information about distributions to DAFs on their annual form 990, including the amount, the name of the sponsoring organization and any donation advice that was included.

•    Prevent private foundations from counting travel and salary expenses paid to a substantial foundation contributor or family member as part of the distribution requirement (currently, private foundations can include those as countable administrative expenses when calculating their 5% payout).

•    Disallow the counting of contributions to DAFs toward annual foundation payout requirements of 5%.

•    Provide an incentive to pay out 7% or more each year of net assets by eliminating the 1.39% excise tax.

•    Replace the existing DAF structure with 15-year DAFs and 50-year DAFs. 

o    15-year DAFs would allow for immediate tax benefits, but only if DAF funds are distributed within 15 years of the donation. Failure to do so results in a 50% penalty. 

o    A donor with a 50-year DAF would continue to receive capital gains and estate tax benefits upon donation but would not receive a charitable deduction until the donated funds are distributed. Failure to do so results in a 50% tax penalty.

•    Create special rules for certain community foundations known as a “qualified community foundation (QCF). A QCF is defined as “an organization that serves no more than four states and which holds at least 25% of its total assets outside of DAFs.”

o    DAFs sponsored at a QCF are exempt from the new DAF proposals if either the DAF holds less than $1 million in assets or pays out at least 5% of the DAF’s assets each year. 

CMF is encouraging our members to connect directly with their representatives and offer to share how this legislation could impact philanthropy. 

Our Government Relations and Public Policy Team has outlined a draft email you can share with your representative to encourage them to connect with you before signing on as a cosponsor of the bill.

Consistent with CMF’s Government Relations Goals adopted by CMF’s Board of Trustees and membership, we support policies that are data-informed, do not impose unnecessary and overly burdensome requirements, consider community impact and recognize the value of endowed philanthropy. 

The ACE Act has been the subject of debate within the philanthropic sector, with opposition from groups like the Council on Foundations (COF), and supporters such as the Initiative to Accelerate Charitable Giving. 

Some suggest that lack of a payout requirement leads to “parked wealth” where funds accumulate in a DAF instead of being distributed to charity – even though the donor receives an immediate tax benefit – and note that in times of crisis these funds are needed more than ever. Others note that the “parked wealth” argument is largely a non-issue given research findings showing higher levels of activity among the majority of DAF accounts.

The Strengthening Community Philanthropy Ad Hoc Working Group, convened by the Council on Foundations (COF), recently released recommendations for the sector outlining steps to strengthen the transparent and effective use of DAFs.

COF’s Recommendations for the Sector to Consider 

•    Funds contributed to a DAF by a private foundation should be distributed within five years for the distribution to be considered part of the private foundation's qualifying distribution.

•    The charitable community should convene to develop recommendations for managing the donations of complex and illiquid assets that apply to all section 501(c)(3) organizations, not just DAFs.

•    Tax laws should encourage individual giving and benefit all donors by incorporating changes like the Universal Charitable Deduction or charitable tax credits for taxpayers who do not itemize and including distributions from an IRA to a DAF as a qualifying distribution. 

•    Define an inactive fund as one in which there has been no distribution out of the fund for three consecutive years.

•    Establish a minimum payout requirement of 5% of the total amount of assets held in DAFs by a community foundation. Community foundations, in accordance with their inactive fund policy, should report on form 990 Schedule D the percentage of inactive funds.

Over the last seven months, United Philanthropy Forum has also convened a working group, which CMF is a part of, that has developed a list of considerations that could help inform a proactive approach to addressing potential reforms that are focused on equity, transparency and accountability. We look forward to sharing more with you as additional recommendations are released.

CMF’s Government Relations Public Policy team will continue monitoring this legislation and share updates with our CMF community. 

Want more?

In 2020 CMF commissioned the Dorothy A. Johnson Center for Philanthropy to launch a payout rate research series and explore: what does the data tell us about payout rates at private foundations, community foundations and DAFs hosted by Michigan community foundations?

Key data points from the series:

•    Private foundations frequently treat the 5% payout as a floor, not a ceiling. 49% of Michigan’s private foundations paid out 6% or more of their corpus during 2018, as did a similar proportion of foundations nationally. More than a third (39%) pay out more than 9% each year. 

•    Nearly two-thirds of DAFs made contributions to charitable organizations in each of the four years included in the DAF study (2017-2020), and 86% of DAFs made at least one grant during the four-year study period.

•    More Michigan DAFs made grants in 2020 than in any other year. The study reported that total grantmaking increased by 19.6% compared to 2019.

We invite you to explore the findings of our payout rate research series.

Read more on the initial ACE Act. 

Review the Council on Foundations’ full series of recommendations. 

We welcome your feedback and questions; please connect with CMF’s GRPP team.