The Deal with Donor-Advised Funds
After wrapping up another season of end-of- year requests from non-profits, it seems to make sense to take a broader look at philanthropy and charitable giving.
Philanthropy in the U.S. is a massive undertaking. In 2020 Americans gave $471 billion to charitable causes. That is almost the same amount the federal government generally spends every month.
Why people choose to give, and what causes they support, is often a deeply personal matter. Some choose to support scholarships, while some support causes they think the government could or should cover; others to further a cause or ideal.
What unites all these gifts is the large impact they have on the federal budget and tax revenue. Those who are giving significant sums of money to a charitable organization, and itemizing their tax returns, receive a fairly significant tax deduction.
One specific area within charitable deductions that has drawn significant interest is donor-advised funds
(DAFs). These are tax vehicles where a taxpayer can donate stock, cash or other items and take the tax deduction in one year, but give the funds away to charitable organizations over many years. In the meantime, the money can be invested tax-free.
The general idea is that sometimes there are major changes in your life that could be a one-time event but are also so large that you’d need time to give away the funds. For example, let’s say you sold a family business for $5 million, and the costs basis was $1 million. Instead of paying capital gains taxes on that $4 million difference, you could put all the profits into a DAF and essentially eliminate your tax bill for that year. Then you could give away that $4 million over the coming years—perhaps $500,000 a year for the next eight years.
As often happens with tax law, it has drifted slightly from its original intentions. In the law there are no limits to when you must give away the money in a DAF. In the example above you could put the $4 million into a donor-advised fund, invest it and let it grow for decades without any of it actually going to a non-profit—and yet you have gotten the full tax write-off.
This has gotten attention in recent years as some tech billionaires have used DAFs to reduce their tax liability to near zero but with very little actually flowing out to charitable causes. As a result, Senators Chuck Grassley (R-IA) and Angus King (I-ME) introduced the Accelerating Charitable Efforts Act (S. 1981) or ACE Act. It is rare for a Republican and Democrat (Angus only recently announced Independent status) to co-sponsor a piece of legislation these days, so many are beginning to take notice of this duo.
The new law would put a clock on DAFs and require those who use them to distribute money to charitable causes within 15 years. A new group called The Initiative to Accelerate Charitable Giving is a champion of this big change, along with some additional tweaks to the charitable law. It’s worth spending some time digging into the proposed changes which are all very common sense, practical and seem to be aligned with voters of all parties. While the bill currently sits in the Senate Finance Committee, consider contacting your Senators with your opinions on the bill.
While this law is unlikely to move quickly through the current dysfunctional system in American politics, it’s a very important step in the mission to amend tax law so it aligns with its true goals. A deduction for giving to charity is a noble and worthy thing for the U.S. to offer, but we should ensure that when someone gets a deduction, the money is going to a charitable organization in a timely manner.