The rules that govern donor advised funds (DAFs) have always been a topic of conversation among lawmakers, and there have been many proposed changes over the years. The most recent effort is the Accelerating Charitable Efforts (ACE) Act introduced in June 2021 by Senators Grassley (R-IA) and King (I-ME).

The stated purpose of the ACE Act is to reform private foundations and ensure that DAFs make resources available to working charities within a reasonable period of time. Although the bill is unlikely to pass in its entirety, it is highly possible that some of the proposed changes will make their way into other legislation. This is particularly true because the Act is considered bipartisan, as Senator King is an independent but caucuses with the Democrats.

This is not a comprehensive list, but I have highlighted some of the most significant changes proposed by the ACE Act that—if passed into law—may affect gifts to Duke and other charitable organizations.

QUALIFIED DONOR ADVISED FUNDS

1. The ACE Act would establish a category of donor advised funds called “qualified DAFs” (QDAFs) that would impose a 15-year limitation on the donor’s advisory privileges, measured from the contribution date. QDAFs would also be required to designate a charitable beneficiary to receive any assets remaining undistributed at the end of 15 years. A penalty tax of 50% of the undistributed funds would be levied on any sponsoring organization whose QDAF does not pay out within 15 years.

2. There is no income tax deduction for contributions of non-publicly traded assets to QDAFs until the DAF sponsor sells the asset. The amount of the income tax deduction is limited to the amount credited to the DAF as a result of the sale (i.e. net of fees and costs associated with the sale).

NONQUALIFIED DONOR ADVISED FUNDS

3. The ACE Act would establish another category of donor advised funds called “nonqualified DAFs” (NQDAFs). For NQDAFs, there would be no income tax deduction for contributions until the NQDAF makes a qualifying distribution to another charitable organization, which cannot be another donor advised fund. The amount of the deduction is further limited to the amount of the qualifying distribution that goes to charity.

4. In addition, contributions of property—such as publicly traded stock, art and real estate—to a NQDAF would receive no income tax deduction until the property is sold, reduced to cash and then distributed to another charitable organization other than a DAF.

5. Nonqualified donor advised funds would suffer a 50% excise tax on any contribution not distributed within 50 years.

QUALIFIED COMMUNITY FOUNDATION DONOR ADVISED FUNDS

Another category of DAFs—qualified community foundation donor advised funds—would be geared toward DAFs sponsored by traditional, regionally oriented community foundations. The definitions here get even more complex and limit the dollar amount over which any single donor can have advisory privileges while also requiring distributions of at least 5% of the DAF assets each year.

In the short term, the mere proposal of the ACE Act may accelerate gifts into—rather than out of—DAFs and private foundations because, if passed, the legislation would increase the regulatory risk associated with DAFs. Because any gifts made to DAFs prior to the Act becoming law would probably be governed by the older, more lenient rules, some donors may wish to hasten gifts to their donor advised funds.

There will likely be great opposition from the non-profit sector for many reasons, including the sheer complexity of the proposed changes that would cause significant difficulty for donors and charities.

If you have questions about the ACE Act and how it may impact donor advised funds, we encourage you to reach out to your financial advisors for more information. Duke’s Office of Gift Planning continues to monitor proposed legislation that may affect charitable giving, and we will provide insights on the Blueprints blog as we learn more.

About the author

Anne Bradley

anne.bradley@duke.edu

Anne helps donors and their professional advisors understand and consider charitable gifts that require some measure of tax, legal or financial planning. Anne’s work includes charitable gift and tax issues related to estates, trusts, life income gifts such as charitable gift annuities and charitable remainder trusts, real estate, and other complex gift arrangements. In 2023 Anne received the Chartered Advisor in Philanthropy designation from the American College of Financial Services. Prior to joining Duke, Anne managed corporate, foundation, and government fundraising for the Detroit Zoological Society. When she’s not at work, Anne roams like Roosevelt visiting our nation’s National Parks.