Senators push measure to accelerate donor-advised funds, foundation giving

Two key U.S. senators introduced legislation Wednesday designed to spur faster payouts from donor-advised funds and foundations, giving new momentum to an effort that has deeply divided philanthropy.

Republican Sen. Chuck Grassley, of Iowa, a former chairman of the Finance Committee who still sits on that panel, and Sen. Angus King, an independent from Maine who caucuses with the Democrats, have teamed up on legislation that closely tracks a plan put forward by the Initiative to Accelerate Charitable Giving, a group of prominent wealthy donors, foundations, and scholars of charitable giving.

“The federal government offers tax incentives to Americans who give back, but in order to ensure that these funds are doing the most possible good, we must reform the rules that govern some charitable donations,” King said in a news release.

Wealthy donors can enjoy immediate tax advantages for establishing family foundations or making big deposits in donor-advised-fund accounts. Foundations are required by federal law to distribute at least 5 percent of assets annually, but donor-advised funds have no such requirements.

The King-Grassley legislation would allow donors to get an upfront tax deduction for donor-advised-fund deposits if they distribute the money within 15 years. Alternatively, donors could choose to delay the income-tax deductions and have 50 years to distribute their charitable funds. Donors could still receive immediate capital-gains and estate and gift tax savings.

The legislation also contains provisions intended to prevent donors of complex assets like real estate from claiming tax benefits that far exceed the actual value of the gifts.

For foundations, the legislation would waive the annual excise tax of 1.39 percent of their net investment income in any year their payout tops 7 percent of assets. Private foundations created after the legislation takes effect could be exempt from the tax if they agree to give away all the assets within 25 years of their founding.

The legislation would bar foundations from meeting their payout obligations by making distributions to donor-advised funds. A recent Chronicle analysis found that $740 million in such transfers were made in 2018, the most recent year for which data was available. Such transfers can help foundations meet their annual payout requirements, but critics say the transfers accomplish nothing for working charities.

In addition, the legislation would not allow foundations to meet their payout obligations by paying salaries or travel expenses of foundation family members, as they can now.

Some of the biggest donor-advised-fund sponsors in the nation are affiliated with commercial finance firms like Fidelity and Vanguard. They generally oppose efforts to require minimum annual distributions from advised funds.

Community foundations, which also sponsor donor-advised funds, also have warily eyed these kinds of efforts to boost payout, arguing that they operate differently.

Ray Madoff, a Boston College law professor and one of the architects of the proposal, said those differences are legitimate and the legislation would waive the reporting requirements for donor-advised-fund accounts of $1 million or less that are managed by community foundations. Accounts larger than $1 million at community foundations would have to be distributed in 15 years or would have to contribute at least 5 percent a year.

Jeff Hamond, coordinator of the Community Foundations Public Awareness Initiative, said he hadn’t seen the legislation yet. Generally speaking, Hamond said that efforts to impose new distribution requirements have been too broad and are “a solution in search of a problem,” but he noted that community foundations are “not opposed to all reforms.”

Independent Sector, a national coalition of charities and foundations, has not weighed in on the effort and declined to comment for this article.

The Philanthropy Roundtable and other conservative groups oppose new distribution requirements, saying they would discourage charitable giving.

Madoff said conversations were continuing on Capitol Hill on how the legislation might advance and whether it can attract more supporters, including in the House.

Madoff noted that recent news reports about billionaires paying minuscule amounts of taxes should serve as an “accelerant” for efforts to boost charitable giving.

“This is a moment when we are appropriately reshaping our tax rules,” Madoff said. “As a society, we make a tremendous financial investment in charitable donations, particularly charitable donations of the wealthy. It’s important that we make sure these resources are put to the use of the public and not just for the use of money managers.”