Proposed tax changes may impact Donor Advised Funds

Proposed tax changes may impact Donor Advised Funds

The Accelerating Charitable Efforts Act

Senate Bill could require more forethought and planning of use of future funds to be donated to Donor Advised Funds

In June 2021, The Accelerating Charitable Efforts Act (ACE) (S. 1981) was introduced in the Senate that would aim to reform the tax rules related to Donor Advised Funds (DAF) and eliminate some of the flexibility currently enjoyed by taxpayers who create and fund DAFs. If enacted, ACE would detail new DAF definitions, rules and limitations, as well as impose an excise tax on the public charities which host the DAF (also known as sponsoring organizations) that do not distribute donated funds to charities within the time period(s) outlined in ACE.

Overview of Donor Advised Funds

DAFs currently provide charitable donors flexibility to plan for and fund future charitable gifts and claim the associated income tax deduction in a high income tax year, without having to determine or specify the ultimate beneficiaries or the allocation of amounts by charitable organization recipient until funds are distributed. While supporting organizations of DAFs differ in their annual distribution requirement, currently no IRS prescribed minimum distribution amount or percentage exists.  As such, the DAF donor may reap some of the benefits of a private foundation structure, without having to comply with the  annual minimum distribution and reporting rules which include income tax filings and payments. Similar to a private foundation, a DAF, depending on the sponsoring organization’s rules and procedures, may also allow the donor to have input on investment decisions of the undistributed DAF funds.

  • To target concerns  that wealthy taxpayers use DAFs to accelerate tax deductions for contributions to high income tax years for tax planning purposes and then let the funds grow and appreciate in the DAF indefinitely before being distributed to charities, ACE would require the DAF to accelerate distributions to the ultimate charitable organizations via the following provisions that define a qualified DAF: Contributions must be identified for a preferred organization at time of contribution
  • Donor’s DAFs, on combined basis, with aggregate value in excess of $1,000,000, adjusted for inflation, after ACE’s enactment either:
    • Remove advisory privilege for donor OR
    • Required qualifying distribution of 5% of the value of the DAF based on previous year end’s value, AND
  • Donor advised fund must either:
    • Terminate 14 years following contribution to DAF or
    • Designate a specific geographic community to cover no larger than four states.

Contributions of non-publicly traded securities to a qualified DAF would result in a tax deduction for donor in the tax year when sale of securities is executed.  The tax deduction would be limited to the gross proceeds received and credited to the DAF account.

“Nonqualifed” DAFs

The ACE Act defines existing DAFs as “nonqualified” DAFs, and outlines new restrictions that would apply to the DAF as well as to the donor on additional contribution to the nonqualified DAF as follows:

  • No current year tax deduction for contribution of property other than cash to the DAF unless:
    • The sponsoring organization sells the property AND
    • The sponsoring organization makes a qualifying distribution to a charitable organization AND
    • The amount of deduction is limited to the amount of qualifying distribution in the tax year.

Distributions are deemed to be funded from contributions and associated investment earnings on a first in, first out basis.

Claiming a Qualified or Nonqualified Donor Advised Fund Tax Deduction

To claim a tax deduction to either a qualified and to a nonqualified DAF, ACE provides requirements for Contemporaneous Consent of Acknowledgement to be issued to the taxpayer by the sponsoring organization within 30 days of distribution by nonqualified DAF or 30 days of receipt of sales proceeds from sale of non-marketable security in qualified DAF to include:

  • Name of donor,
  • Detail related to contribution, dependent upon qualified/nonqualified DAF gifted to:
    • Qualified DAF:
      • Certification asset was sold,
      • Certification qualifying distribution made during tax year end from the proceeds generated by contribution,
        • If asset sold, certification of asset sale, gross proceeds amount and deposit into taxpayer’s DAF, and statement that deductible amount may not exceed gross proceeds received in sale and deposited into taxpayer’s DAF account,
      • Amount of qualifying distribution, AND
      • Statement that deductible amount is limited to qualifying distribution, OR
    • Nonqualified DAF:
      • Certification asset was sold and proceeds deposited to DAF account,
      • Amount of qualifying distribution, AND
      • Statement that deductible amount may not exceed gross proceeds received in sale and deposited into taxpayer’s DAF account,
    • This acknowledgement is also to be filed with the Secretary of the Treasury, but leaves the mechanics of the reporting to be determined by the Secretary of the Treasury.

DAF Sponsoring Organization Tax Considerations

ACE also targets the sponsoring organizations with the responsibility to monitor and enforce these proposed rules by assessing a 50% excise tax for failure of the DAFs to meet make annual minimum distribution requirements. However, community foundations would be exempt from the excise tax rules. This proposed excise tax would also limit the life of non-qualified donor advised funds to 49 years, after which time, the sponsoring organization would be subject to the excise tax on the value of the undistributed assets.

Status of ACE Act

No action has been taken on the ACE Act since its introduction in June. There is mixed support within the charitable community for the legislation, though most in the charitable community feel something needs to be done to keep contributed funds from sitting in DAFs indefinitely.

Other Donor Advised Fund Considerations

As part of the COVID relief legislation passed late in 2020, for tax year 2021 only, the limitation on the deduction for CASH contributions to public charities is 100% of adjust gross income (AGI). The normal limitation is 60% of AGI. Contributions to DAFs do not qualify for this increased deduction limit.

The Keiter Tax Team is closely monitoring the ACE Act and other proposed tax legislation. We will keep you informed on new and changing regulations to assist you with tax planning and saving strategies.

Questions on tax planning using charitable contributions for your unique needs? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000


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About the Authors

Ann has 20 years of tax experience in the public accounting sector. Ann applies her experience to provide tax planning opportunities and insights to operating entities, investment partnerships, trusts and high wealth individuals and families. Currently, Ann works closely with individuals and family offices to address their various tax compliance, consulting and estate planning needs. She also serves as an advisor to her clients on matters indirectly related to taxes. Ann is a member of Keiter’s Family, Executive & Entrepreneur Advisory Services team.

Mike is a Director at Keiter. Mike’s clients benefit from his 45 years of experience and tax insights. His consulting clients include closely-held businesses in the real estate, home building, manufacturing, construction, retail and wholesale industries. He also serves many estates, trusts and foundations.

Mike has significant knowledge and experience in planning and structuring acquisitions and sales of businesses, succession planning, executive compensation and benefit programs, estate planning and administration, tax issues of non-profit organizations, and tax planning for businesses and their owners.

The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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