Understanding the ACE Act's Potential Effect on Donor Advised Funds

Oct. 5, 2021 null

At the Community Foundation, Donor Advised Funds (DAFs) are the most popular charitable giving fund we offer. We often describe them with words like simple, powerful and personal. A Community Foundation DAF can be fully spendable to any charity nationwide, or they can be endowed. Endowed DAFs can also qualify for the Endow Iowa Tax Credit. They can be invested through one of our investment portfolios or with a local financial advisor. Donors can contribute cash, stock or a number of other non-cash assets. Because of that flexibility, DAFs are not only our most popular charitable giving fund type, they are also our fastest growing. 

And that growth trend is not unique to the Community Foundation of Greater Des Moines. 

The nearly 1,000 charitable organizations that serve as DAF sponsors reported a 400% increase in the total number of DAFs over the last 5 years, according to the National Philanthropic Trust’s 2020 DAF Report. In 2019 alone, contributions to DAFs totaled a record $38.81 billion and grants from DAFs totaled $27.37 billion (also a record). 

Unsurprisingly, that popularity and growth has resulted in increased attention from those of us that continue to champion the use of DAFs as well as from those that are a bit more skeptical. Earlier this summer, perhaps motivated by that increased attention, Senators Chuck Grassley (R-IA) and Angus King (D-ME) introduced the Accelerating Charitable Efforts (ACE) Act which, if approved, would add unprecedented regulation to an otherwise highly flexible giving vehicle. 

What is the problem the ACE Act aims to solve? 

Supporters of the legislation hope to see an increased outflow of dollars from private foundations and DAFs to charitable causes. For example, the ACE Act would redefine DAFs into three unique categories, each with its own required distribution policy. Currently, there is no required distribution policy for DAFs, although many community foundations have inactive fund policies and encourage consistent giving from their donors. 

What do opponents of the ACE Act say? 

Opponents point to the historic distribution rates from DAFs and observe the outflow of dollars from DAFs to charitable causes is already significantly higher than what is proposed by the bill, and the added complexity could have negative effects on giving. 

What are the proposed DAF categories? 

As mentioned above, the ACE Act would redefine DAFs into three categories: 

Qualified Community Foundation DAF (QCFDAF): Individuals with one or more DAFs at a qualified Community Foundation, such as the Community Foundation of Greater Des Moines, would not be subject to any distribution requirements if the total QCFDAF fund(s) balance remains below $1 million. If, however, the fund balance exceeds $1 million, the QCFDAF would be subject to a minimum annual distribution of 5%. 

Qualified DAF (QDAF): Individuals who wish to receive an immediate tax deduction could establish a QDAF by committing to distributing the full balance of, or revoking their advisory privileges on, each contribution within 15 years. The sponsoring organization could face penalties for failing to fully distribute within that period. 

Nonqualified DAF (NQDAF): Any DAF that does not meet the criteria for a QCFDAF or QDAF would be classified as a NQDAF and would be subject to deferral of tax deductions until distributions are made from the fund. In addition, each contribution must be fully distributed within 50 years. 

What else does the ACE Act say about DAFs?

In addition to defining the aforementioned three DAF categories, the Act proposes several reforms to private foundations. Most relevant to DAFs is a change to the 5% private foundation distribution policy that would no longer count distributions to DAFs toward the required distribution. 

Our team continues to keep an eye on this proposed legislation. If you have any questions or if you would like to learn more about how a donor advised fund can support your client’s charitable goals, please reach out to Jordan Richardson CAP®, Director of Charitable Giving at richardson@desmoinesfoundation.org