September 29, 2021

Donor Advised Fund Reform: the ACE Act

By Bob Sorge

Bob Sorge

Madison Community Foundation’s (MCF’s) mission is to enhance the common good through philanthropy. While its operating structure and focus areas have evolved over its 79-year history, its purpose has remained largely the same, “… to receive and accept property to be administered exclusively for charitable purposes, primarily in, and for the benefit of the people of the metropolitan area of Madison.” The definition of metropolitan Madison has also evolved over those years (thanks to the United States Census Bureau), and now includes Dane, Columbia, Iowa, Green, and parts of Sauk and Rock Counties.

The Benefits of Donor Advised Funds

One of the tools MCF uses to help donors realize their charitable goals is the donor advised fund (DAF), which emerged in 1931 when the New York Community Trust established the first one.

DAFs were created to give people a vehicle through which they could contribute assets (often at key moments in their lives, such as during the sale of a business), and then recommend distributions from those assets over time. DAFs also create a way for families to link arms across generations and create permanent legacies for the communities that have helped them thrive.

Typically, a large share of distributions from DAFs are made in a donor’s home community, and so community foundations – with their local knowledge – are a logical partner to administer these funds.

When functioning properly, the resources provided to society through a DAF far surpass the amount of the initial tax break received by a donor. In the simplest scenario, if someone was in a 35% tax bracket and gave $100, society would get $65 – nearly twice what it would have collected in taxes – and the donor would receive a $35 tax break.

If this contribution were invested in an endowed fund, it would generate annual investment returns – typically for generations – yielding far more for society than that original contribution. Check out this hypothetical scenario based on annualized MCF returns over just the last decade:

Graph illustrating the power of an endowment fund

When DAFs Don’t Work

While the vast majority of DAFs get financial resources into the community, plenty of cases exist where dollars go into such funds and they don’t come out, or they come out at a fraction of what they should, or perhaps in unanticipated ways.

Over the last decade (or so) many versions of legislation have been introduced to address these issues. Unfortunately, these versions failed to appreciate the differences between the types of organizations that sponsor DAFs, and the nuances found in the different types of DAFs.

However, the most recent legislation – the Accelerating Charitable Efforts (ACE) Act - while not perfect, is much stronger than previous versions. The bill shows a clear understanding of the differences between community foundations, commercial gift funds and private foundations, as well as the unique character and purpose of different forms of DAFs.

The ACE Act is bi-partisan legislation, co-sponsored by Angus King (an independent from Maine who caucuses with Democrats) and Chuck Grassley (a Republican from Iowa). Here’s a good description of what’s in the bill.

A Field Divided

The ACE Act offers reasonable new regulation to ensure society is receiving the benefits it bargained for when it provided donors with tax breaks for their charitable contributions. Some of my colleagues would disagree.

In fact, many organizations – including the Council on Foundations, the Community Foundation Public Awareness Initiative and others – have teamed up with commercial providers and some private foundations to fight the legislation. There’s more on their opposition here. But a healthy and growing chorus in support of the legislation also exists.

One of the most insightful presentations on the legislation was offered on September 15 by Matthew Evans from the United Philanthropy Forum (and co-hosted by the Wisconsin Philanthropy Network). He described some of the gaps in the current proposal, but also suggested there is some good content in the bill and that it may be better to work with the current sponsors to refine the bill than to reject it completely. Madison Community Foundation shares this perspective.

Evans also acknowledged that the ACE Act has little momentum in Congress right now and therefore has little chance of passing anytime soon. However, given the number of bills authored on this subject over the last decade, new legislation is likely in the near future.

Enhancing the common good through philanthropy is MCF’s mission. This legislation both supports philanthropy and ensures that the common good is served by it.

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