During the holiday season, charitable giving is front and center in many people’s minds. While there are many vehicles for charitable giving, Donor-Advised Funds (DAFs) are perhaps the most simple and cost-effective way to make significant and impactful long-term charitable gifts.
The 411 on Donor-Advised Funds
In our previous blog, we explained that a DAF, similar to a bank account, is an irrevocable charitable giving account that allows a donor to make a charitable gift without choosing a specific organization or charity right away. This time period between when a sum is deposited into the account and when it is donated to the chosen qualifying charity allows the money to grow tax-free.
There are quite a few pros to utilizing DAFs, making them a popular option for charitable giving today. For starters, they are rather easy to set up and straightforward to use, and they provide several tax advantages to the donor, including the possible qualification for a charitable tax deduction in the year you donate.
Furthermore, because there are no reporting or administrative requirements for the donor, transactions can remain private. A cherry on top, DAFs accept more than just cash. Acceptable assets include cryptocurrency, stocks, private business interests, and more.
DAFs and Biden’s tax plan
With President Biden’s proposed tax policy changes hanging in the balance, there is a lot of uncertainty about what the future holds for DAFs. In June of 2021, the “Accelerating Charitable Efforts Act” or “ACE Act” was introduced, designed to expedite charitable giving. How? By modifying the charitable deduction rules and placing various limitations on on these accounts.
First of all, the legislation proposes that in order to receive an upfront charitable contribution deduction, contributions would need to be made either to “qualified” DAFs within 15 years or to “qualified community foundation” DAFs that were required to distribute at least 5% of their value each year, with an exemption made for any accounts valued at $1 million or less. Additionally, there would be a limitation on deductions for non-publicly traded assets.
With an alternative 50-year DAF, donors wouldn’t receive a charitable contribution deduction on their income tax returns until the donated funds were distributed, with all funds having to be distributed within 50 years of the initial donation. No deduction would be allowed for non-cash contributions until said assets were sold and distributed.
Where does that leave us?
In the past, proposed legislature to accelerate distributions from DAFs has proven controversial amongst the charitable sector. However, coming off of the global COVID-19 pandemic, it is hard to predict what the future holds. While uncertain times tend to stir up feelings of fear, we caution anyone against making rash year-end moves. Nobody can predict the future. The best course of action is to wait and see.