More on Donor Advised Fund Distributions

Take-Away: A recent study with regard to Michigan donor advised funds might provide additional support for a Congressional change to require faster distributions from donor advised funds.

Background: A recent missive referenced a bill currently before Congress to  accelerate distributions from donor advised funds (DAFs.) That bill, co-sponsored by Senator King (Independent, Maine) and Senator Grassley (Republican, Iowa), would change existing DAF rules to: (i) continue to provide an immediate charitable income tax deduction if the funds transferred to the DAF were distributed within 15 years of the contribution to the DAF; (ii) would require all contributed funds to be distributed from the DAF within 50 years of the contribution; and (iii) would either reduce or eliminate any charitable income tax deduction if the funds contributed to the DAF were distributed beyond that 50-year period.

Accelerate Charitable Giving: There is also a strong and highly vocal public group that calls itself the Initiative to Accelerate Charitable Giving, comprised of law and tax professors and philanthropists, which  objects to donors receiving immediate income tax benefits, i.e. charitable income tax deductions, but who do not distribute those resources to the community within a reasonable time after benefiting from the income tax charitable deduction. This organization advocates that DAFs should be placed on par with a private foundation which must distribute at least 5% of its assets to charity each year.

Study Result: A recent article in the Chronical of Philanthropy, “New Study Shows That Majority of Donor Advised Funds Are Sending Little or No Money to Charity Every Year” provides some additional ammunition to Senators King and Grassley and the Initiative to Accelerate Charitable Giving for change the existing DAF rules and regulations.

The article reports on a study of donor advised funds at Michigan Community Foundations. The study found that in 2020: (i)35% of these DAFs no money was distributed; (ii) 22% of the DAFs distributed less than 5% of the funds held in the DAF; and (iii) 43% of the DAFs distributed more than 5% of their funds. In addition, over the period of 2017 through 2020, 86% of the DAF’s gave money to working charities.

Conclusion: We learned (some would say the ‘hard way’) from the SECURE Act that Congress can increase its revenues not by increasing taxes but merely by changing rules that accelerate the recognition of taxable income with regard to inherited retirement accounts. Perhaps we might find a similar solution that decelerates charitable income tax deductions to those DAFs that are deemed too slow to distribute their funds to charities.