Reforms may be on the way for Donor-Advised Funds

Donor-advised funds are a popular option to minimize capital gains tax, but a bill introduced this summer in the Senate could significantly impact these funds if it should be passed.

The Accelerating Charitable Efforts (ACE) Act was introduced by Sens. Angus Kin of Maine and Chuck Grassley of Iowa in June. The ACE Act would overhaul rules on donor advised funds with new definitions and limitations, as well as add an excise tax on sponsoring organizations that do not timely distribute donated funds to charities in an effort to prevent the warehousing of charitable assets.

The purpose of a donor-advised fund is to support the charitable organizations you care about while being a tax-smart investment solution.  Currently, you can set up an account and contribute cash, securities, and/or appreciated assets and be eligible for a tax deduction in the current year.  The tax deduction for cash contributions is limited to 60% of adjusted gross income (AGI), but can be taken in the year the contribution is made.  These contributions are irrevocable and cannot be returned to the donor.  They can be set-up into mutual funds or exchange-traded funds to grow the money for a good cause.

Under the ACE Act, though, there would be two permissible forms of DAFs:

  1. Qualified DAF, which must terminate within 14 years following the year of the contributions
  2. Qualified Community Foundation DAF, which serves a specific geographic community no larger than four states.

If the ACE Act should become law, existing DAFs would be considered “nonqualified” DAFs and contributions would be subject to restrictions, such as:

  • If noncash assets are contributed, no deduction would be allowed unless the noncash assets are sold for cash and the donor makes a qualifying contribution;
  • No deduction would be allowed until a qualifying distribution is made;
  • Deductions are capped at the amount of the qualifying distribution; and
  • Distributions are made on a first in, first out basis.

Furthermore, sponsoring organizations responsible for DAFs would be subject to an excise tax that would equal 50% of contributions and any attributable earnings if they failed to make annual minimum distributions.

While no action has been taken on the ACE Act since it was introduced this summer, we will continue to monitor any legislative changes that could impact you.

Kristy Gailey is a Manager with our Business and Tax Advisory Group. She can be reached at kgailey@antarescpas.com.