Understanding Both Sides of Proposed Accelerating Charitable Efforts Act
The Accelerating Charitable Efforts (ACE) Act was proposed in June 2021 by Senators Charles Grassley (R-IA) and Angus King (I-ME) to speed the movement of money from donors and foundations to nonprofit organizations. However, the legislation has sparked great debate over its intent and the potential implications, if passed. Here's what you need to know.
Given the growth of philanthropic services within wealth management advisories, it is important for advisors to understand how the proposed legislation may impact their clients’ use of donor-advised funds (DAFs) and foundations.
Clients expect their financial advisors to be trusted experts able to guide their holistic wealth goals, which increasingly includes charitable objectives. As the policy debate continues, financial advisors should be aware of how the law may impact their clients' charitable behavior.
Laying out the philanthropic landscape
Donor-advised funds currently house $142 billion in assets, while private foundations house over $1 trillion. Both entities have seen annual growth exceed 16%, as their popularity builds. However, the amount granted annually to non-profit organizations comprises a fraction of that, which has stirred controversy in recent years.
Some argue that foundations and DAFs serve as warehouses for wealth, and thus need impetus to make grants move more quickly after initial contributions. Others contend that as DAFs and foundations grow dramatically, they are funneling tens of billions to non-profit organizations; they warn that restrictive legislation may inadvertently reduce funds granted to active non-profits.
Introducing the Accelerating Charitable Efforts Act
The tax bill is intended, per Senators Grassley and King, to reform private foundations and ensure that donor advised funds (DAFs) make resources available to active non-profit organizations in a "reasonable period of time.” The updated rules and timelines are intended to create structure around the flow of assets through charitable vehicles to working non-profits.
ACE Act Proposals: Private Foundations
- 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.
- Private foundations can avoid excise tax of 1.39% if payout 7% or more or by being established for a 25-year term.
- Foundations created after the legislation takes effect could be exempt from the tax if they agree to give away all assets within 25 years.
ACE Act Proposals: Donor Advised Funds (DAFs)
- Donors get all tax benefits at time of contribution if account funds are distributed within 15 years.
- Donors can get up to 50 years, by delaying income tax benefits at time of distribution. Donors could still receive immediate capital-gains and estate and gift-tax savings.
ACE Act Proposals: Community Foundations (CF)
- No requirement to track or report on DAF accounts that are $1 million or less.
- Non-exempt accounts can meet payout with a 5% payout rule or distribution in 15 years.
- Qualified community foundations are redefined as organizations formed for the purpose of understanding needs of a geographic community that have at least 25% of assets in non-DAF funds.
Central Perspectives on the Charitable Debate
Those in favor of the proposed legislation commonly argue that:
Proposed Benefits – There are currently no limits or guardrails on DAF payout; thus, the Ace Act closes loopholes to ensure money goes to NPOs in timely manner. By putting timelines on donor-advised funds, the Act would speed up the movement of funds going to active NPOs. They also argue that a timeline of 15 years is a reasonable and generous expectation for payout to NPOs. This would be ample time for funds to be reserved in case of emergencies and unexpected disasters.
Further, they indicate that community foundations would not be impacted negatively, and would experience fewer restrictions than commercial DAF, contrary to what opponents believe.
Statistics on Payout – This legislation would impact roughly $1.5T assets currently in foundations and DAF, which means that NPOs would receive greater funding in a shorter amount of time than they historically have.
Some also argue that current payout reporting by National Philanthropic Trust, a leading source of data on donor-advised funds, is distorted and thus makes it seem as though there is greater movement of money. Further, some reports indicate that at least $1B of DAF grants goes to another DAF or foundation, rather than active NPOs, which further distorts payout rate data.
By contrast, a recent Michigan report shows a DAF payout rate of 3.1%, which is below the 5% currently required of foundations. This, however, only reflects data from one of 50 states.
Policy Landscape – Legislation to benefit charitable sector should not be mutually exclusive. It is possible to pass this Act while helping other aspects of the non-profit sector that need policy support.
By contrast, those who oppose the legislation as currently proposed believe that:
Unintended Consequences – The Act would add costs, complexity, administrative burden to NPOs without increasing the donations. With fewer tax incentives for charitable giving, the contribution rate may actually be harmed rather than helped. Similarly, the Act will not speed up charitable giving as intended; giving is completely voluntary and threatening advisory privileges could diminish giving.
Statistics on Payout – Some argue that the Act is not backed by concrete enough numbers; the current payout rate is about 20% annually, this legislation sets floor at 5%. Those of this position argue that it does not make sense to set the floor lower than current donation rates.
Policy Landscape – Legislation, specifically that addressing the non-profit sector, is incredibly slow-moving and difficult to pass. Opponents argue that the ACE Act distracts from other policy advocacy that may support NPOs to a greater degree. Those who oppose for legislative reasons would like to see action elsewhere or would like to put forth a more specific or narrow bill. They propose that greater benefit would result from more intentional legislation.
The ACE Act is one of the most contentious pieces of legislation impacting the non-profit sector in recent years. In your opinion, will the legislation indeed drive greater flow of charitable gifts or will it inadvertently hinder it?