The Accelerating Charitable Efforts Act (“ACE Act”) is creating quite a stir among nonprofits and leaders in or advising the sector. The TL;DR version of the controversy: the increase in the funds donated to the charitable nonprofit sector resulting from donor advised funds (DAFs) either offsets or fails to offset the problems associated with (1) the warehousing of charitable funds and (2) the substantial tax and other benefits enjoyed by very wealthy donors to DAFs. The fundamental premises underlying this issue are:
- Agreed: DAFs increase the overall amount of funds given to and received by 501(c)(3) organizations;
- Agreed: DAFs represent one of the fastest growing segments of the nonprofit sector in terms of total dollars received and managed
- Agreed: Giving to DAFs, which are housed within public charities, provides major donors with far more beneficial tax advantages than giving to private foundations (which has a public cost)
- Argued: DAFs either increase or decrease the overall amount of funds used to further charitable activities (used by so-called working charities)
- Argued: Many donors to DAFs are motivated either more or less by the tax benefits, reputational benefits, and benefits associated with having practical control over charitable funds in a DAF than by the public good that can be advanced with those funds
Earlier this week, The Chronicle of Philanthropy sponsored a debate on the ACE Act moderated by Stacy Palmer and featuring Stephanie Ellis-Smith (Give Blck), Kathleen Enright (Council on Foundations), Melanie Lundquist (Giving Pledge Signatory), Ray Madoff (Boston College Law School), and Steve Taylor (United Way Worldwide). The following are some of the highlights along with some of my thoughts.
Summary of Selected Provisions
ACE Act Proposals: Private Foundations (PFs)
- Contributions to DAFs cannot count toward 5% payout-requirement unless funds come out of the DAF by end of year following contribution.
- Salaries and travel expenses to family members cannot count toward 5% payout requirement.
- Incentives for faster payout: PFs can avoid excise tax by payout of 7% or more or by being established for a 25-year term.
ACE Act Proposals: Donor Advised Funds (DAFs)
- Donors get all tax benefits at time of contribution if account is distributed within 15 years.
- Donors can get up to 50 years, by delaying income tax benefits to time of distribution.
ACE Act Proposals: Community Foundations (CF)
- No requirement to track DAF accounts that are $1 million or less.
- Non-exempt accounts can meet payout with a 5% payout rule (in addition to options provided in regular rules).
- Qualified CFs re defined as orgs formed for the purpose of understanding needs of a geographic community that have at least 25% of assets in non-DAF funds.
Two Benefits with the ACE Act
- ACE Act will speed up the funds going to working charities.
- ACE Act will partly address the power imbalance and inequities of donors continuing to have significant control (even if not legal control) over their previously donated gifts.
Two Concerns with the ACE Act
- ACE Act will not speed up the funds going to working charities. Charitable giving is completely voluntary and threatening advisory privileges could diminish giving.
- ACE Act will add burdens to all charities sponsoring/managing DAFs.
Highlights from Speakers
Ray Madoff (supporter):
- Private foundations hold $1.2 trillion in assets.
- 30 years ago, 5% of giving went to charitable intermediaries (private foundations); now, 28% of giving goes to charitable intermediaries (private foundations and DAF sponsoring organizations).
- This change in giving has cost working charities to lose out on $300 billion over a 5-year period.
- Policies shouldn’t be influenced by average distributions (in response to the argument that DAFs on average pay out significantly more than private foundations).
Kathleen Enright (opponent):
- The panel is united in its call for more dollars to nonprofits, especially in times when they are more needed and vulnerable.
- Philanthropy is an ecosystem with all kinds of environments and addressing issues with all kinds of time frames.
- There are three troubles with the ACE Act:
- Reforms should be backed by national data. DAFs payout in aggregate 20% per year. [RM states that this average, while probably overstated, shouldn’t influence policy where a large percentage of
- Legislation should not be so complex. May end up adding much more cost without attracting more dollars dedicated to charitable purposes.
- May shrink the amount of giving.
Stephanie Ellis-Smith (supporter):
- The ACE Act will result in more funds going to advance equity.
- While the warehousing of charitable funds hits all working charities, the hit disproportionally impacts communities of color.
- Guardrails and guidelines are important to donors.
- The ACT Act will not inhibit giving because most donors are not motivated by any tax benefits and the ultra-wealthy are generally looking for ways to be more intentional about their giving.
Melanie Lundquist (supporter):
- The ACE Act is needed to prevent charitable funds from sitting in investment accounts for far too long after donors have received tax benefits for making these contributions.
- Donors need incentives to give the money out; they already have incentives to give.
- The 15-year time frame for the donors’ money to go to working charities is extremely generous.
- The ACE Act will not diminish giving from most major donors.
Steve Taylor (opponent):
- There is a problem, but the ACE Act is too broad.
- The problem has more to do with for-profit organizations exploiting 501(c)(3) organizations to make more profit, and this is exemplified by investment companies using DAFs.
- The ACE Act is not viable and will not move through Congress partly based on the large number of proposed bills before Congress and partly based on the lack of political capital where the nonprofit sector itself is not unified on the bill.
- It’s therefore not in the best interests of the nonprofit sector to use political capital on this bill rather than on a more unified piece of legislation like that regarding the universal deduction.
Summary of Accelerating Charitable Efforts Act (“ACE Act”) (Council on Foundations)
Ray Madoff on the Initiative to Accelerate Charitable Giving (The Business of Giving)
Accelerating Charitable Efforts Act Introduced (Morgan Lewis)