14/06/21

US: Draft Bill proposes significant changes to US federal rules on DAFs and private foundations.

As published on step.org, Monday 14 June, 2021.

Two US senators have announced plans to introduce a Bill making substantial changes to the rules governing donor advised funds (DAFs) and private foundations.

The Accelerating Charitable Efforts Act, sponsored by senators Angus King and Charles Grassley, would mandate operational changes for DAF sponsoring organisations; and offer tax incentives to deter donors, sponsoring organisations and private foundations from amassing their funds and encourage them to distribute them to public charities more quickly.

The proposed changes are already being debated in the American philanthropic community, says US law firm Patterson Belknap Webb and Tyler. DAFs in particular have been widely adopted by philanthropists since their introduction in 2006. They are similar to foundations in that their funds are owned by a public charity, but the donor or their representative retains advisory privileges over the distribution or investment of the funds. Currently, a donor can generally claim a charitable contribution deduction in the tax year in which they make a contribution to a DAF, and can later recommend charitable distributions from the DAF to other public charities.

The King-Grassley Bill divides DAFs into three kinds, each with different rules for tax-deductibility of donor contributions. The most significant proposed new rule is that any part of a contribution to a DAF that is not distributed within 15 years becomes subject to a 50 per cent tax, assessed on both the amount of the contribution and the earnings from it. This effectively creates a 15-year distribution rule. Moreover, the donor's advisory privileges with respect to any contribution are also terminated after 15 years.

A further restriction is that charitable deductions will not be allowed on donations of anything but publicly traded shares, until the sponsoring organisation sells the contributed assets. The amount of the tax deduction would be limited to the certified disposal proceeds.

The Bill will also severely limit the amount that sponsoring organisations can provide to public charity, despite their public charity status. Total aggregated contributions to the organisation during the taxable period cannot exceed 2 per cent of the organisation's total funding during the period.

As for private foundations, a new rule will deny relief from the 1.39 per cent tax on investment income (under the so-called 4940 tax), unless the foundation either distributes at least 7 per cent of the total value of its investment assets or its lifetime is limited to 25 years. The Internal Revenue Service will be given the power to recapture the investment tax for the first year in which the foundation fails the relevant requirements for limited duration or makes distributions to a disqualified private foundation.

'These changes, if adopted by Congress, would constitute substantial changes to the operations of DAFs, their sponsoring organisations, and private foundations', commented Patterson Belknap Webb and Tyler.