Stalled US bill on donor-advised funds prompts fight over charity laws

A U.S. bill that would place new restrictions on donor-advised funds with the goal of getting them to pay out sooner appears to have stalled in Congress. But the conversations it has started about how to get the wealthiest Americans to donate to charities faster are likely to continue regardless of its fate, according to experts following the legislation. The Accelerating Charitable Efforts Act was first introduced in the Senate in June with the aim of freeing up money set aside for charitable giving and held in DAFs by imposing a cutoff time for it to be paid out. Members of the House of Representatives introduced their version of the bill in February. But the legislation has not yet advanced in the House or Senate. Neither version has been approved by a committee, a necessary step for moving legislation toward passage in either chamber. The offices of the lead sponsors in each chamber — independent Sen. Angus King and Democratic Rep. Chellie Pingree, both from Maine — did not respond to multiple requests for comment on the legislation’s status. Still, foundations, philanthropic organizations, and nonprofits have continued to debate the central idea of the bill, which is whether wealthy donors should face legal requirements to distribute their charitable funds faster. Several major foundations, such as the Ford Foundation and the William and Flora Hewlett Foundation, have come out in favor of such changes. But influential trade groups like the Council on Foundations, which represents the philanthropy sector, have opposed proposals to force donors' hands. “We’re kind of at the beginning of a philanthropic reform movement that is part of an overall critique of excessive wealth or excessive wealth inequality. And we don’t necessarily have to agree with every single proposal, but we see this as an emerging movement,” said Jan Masaoka, the CEO at the California Association of Nonprofits, which supports the bill. DAFs are private accounts in which individuals can deposit charitable contributions over time. They are typically managed by large financial institutions, as with Fidelity Charitable, or by community foundations that serve a specific geographic area or community. An estimated $160 billion is currently held in the funds, according to a recent report from the National Philanthropic Trust, a grant-making institution that manages DAFs. Current U.S. law allows DAF holders to receive an immediate tax break when they set up an account, without requiring them to pay out the money by any specified time. Under the bill in Congress, upfront tax benefits for donors would be contingent upon DAFs distributing funds to charities within 15 years of donation. Advocates for the bill have said that changes to DAF rules are necessary to ensure that philanthropic dollars do not continue to be withheld from nonprofits as wealth increases among the richest Americans. The legislation has been praised by some private foundations, community foundations, and other nonprofit groups, including Arnold Ventures, the Ford Foundation, GiveDirectly, Global Citizen, and the Hewlett Foundation. All are members of the Initiative to Accelerate Charitable Giving — a coalition led by billionaire philanthropist John Arnold and Boston College law professor Ray Madoff. “With extreme poverty increasing, the time to act is now as patience is not a luxury the poor can afford. Rather than charitable funds sitting and collecting dust, we should be encouraging people to spend in a timely manner,” said Michael Faye, the president of GiveDirectly, in a statement from earlier this year. Why many community foundations oppose the bill Masaoka noted the role that community foundations can play in changing oversight of DAFs. The ACE Act includes a carve-out exempting these groups from many of its provisions to assuage concerns that the new requirements would be burdensome to smaller community foundations that have relatively few staffers and resources. Yet opposition among community foundation leaders has remained strong. Masaoka said she believes this is reflective of the growing importance of DAFs for community foundations that manage those accounts. Within the past 20 years, many have seemingly shifted their focus from addressing community issues to courting donors — and that isn’t a good thing, she said. “Increasingly, the people that are hired to run community foundations are not people being hired because of their commitment to or knowledge of the community. They’re being hired for their ability to fundraise,” Masaoka said. However, many of these foundations have said that the proposed legislation would diminish their ability to support community-focused giving. The definition of community foundations included in the bill disqualifies any organization with more than 75% of its assets in DAFs, which would exclude many smaller community foundations, according to Jeff Hamond, a lobbyist who represents the Community Foundation Public Awareness Initiative at Van Scoyoc Associates. Meeting the bill’s requirement to track funds valued at more than $1 million would be costly and burdensome for those smaller organizations, he said, and it also seems unnecessary since DAF money doesn’t tend to sit for long at community foundations. When DAFs do go dormant at community foundations, it is usually because donors want to issue a big grant in coming years or because they may have granted out most of the money and only a little remains, he said. One of Hamond’s primary concerns is that the legislation tries to apply a “broad brush” to a large and complicated issue, he said. “There’s this implication in the language that it’s always abusive, that because somebody can put money in a donor-advised fund and not make grants that somehow it’s happening all the time. And we just think they’re overstating it,” he told Devex. The bill’s authors “should identify what the real problems are and come up with solutions that address those problems and not want to rewrite the entire [tax] code section for a small set of problems,” he said. Madoff, who helped write the legislation, told Devex she believes the bill has addressed many of the concerns raised by community foundations. “We had a lot of conversations with community foundations throughout the entire process. And what they told us were two things: first, they were concerned about the very small community foundations and second, they wanted to be recognized as different from commercial DAF sponsors. The ACE Act does both of those things,” she told Devex in an email. She added that the definition of community foundations was drafted by a community foundation president, though she would not disclose that person’s identity. Momentum for DAF reforms Opposition to the bill stretches beyond just community foundations. The Council on Foundations has opposed the bill despite having members that support it, such as the Ford Foundation. The trade group this year released its own recommendations on overhauling DAFs. For example, it suggests that community foundations enforce an annual 5% payout for their DAFs and that funds contributed to a DAF by a private foundation be distributed within five years to be considered part of the foundation’s qualifying distribution. The Initiative to Accelerate Charitable Giving said it welcomed this “additional momentum to the reform conversation.” The National Philanthropic Trust, another opponent to the legislation, has been meeting with congressional offices to dissuade them from passing the bill. “Research overwhelmingly affirms that people give more when giving is easy, low cost and tax smart. Restrictions to DAFs will shift many donors to foundations which move money more slowly and at a higher expense,” said a statement provided to Devex by spokesperson Jenny Rosenberg. Vanguard Charitable, a leading national group managing DAFs, also questioned the bill’s necessity. It said that DAFs have granted 20% or more of their assets to nonprofits every year on record, “resulting in billions of dollars for hardworking nonprofits across the country and around the world,” according to a statement provided by Rosenberg, who also represents Vanguard Charitable. The National Philanthropic Trust report showed that the DAF payout rate was 23.8% in 2020, the most recent year for which data was available. That is “one of the highest payouts on record,” the organization said. It also showed that while DAFs had only about 14.5% of the assets held by private foundations, they granted half of the dollar amount that private foundations did in 2020. A separate study conducted by the Donor Advised Fund Research Collaborative and funded by the Bill & Melinda Gates Foundation found that 79% of the DAFs opened in 2017 would distribute money quickly enough to deplete initial contributions to those accounts within 15 years. However, it also found that funds with the biggest assets had lower payout rates. A bipartisan group of lawmakers from the House Ways and Means Committee, the chamber’s tax committee, have urged their colleagues not to pass the legislation, which they said would “reduce the flow of charitable dollars and make it more difficult for donors to respond during future economic downturns.” The lawmakers characterized advocates of the bill as “activist groups.” Yet Madoff said there is still strong backing for the bill and highlighted the ongoing support from sector leaders like the Ford and Hewlett foundations, the W.K. Kellogg Foundation, and the Leukemia & Lymphoma Society. “There are a lot of supporters of these issues because they know that they are common sense issues,” she said.