05 June 2014

Donor-Advised Funds Hoping to Roll Back Spend-Down Mandate in Camp Tax Overhaul

Reproduced with permission from Daily Tax Report, 108 DTR G-1 (June 5, 2014).
Copyright 2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

Donor-advised fund representatives are hoping to dial back a proposed five-year spend down requirement that would be imposed on funds as part of House Ways and Means Committee Chairman Dave Camp’s (R-MI) draft Tax Reform Act of 2014.

Under the Camp discussion draft, donor-advised funds (DAF) would be subject to a 20 percent excise tax on DAF contributions that aren’t disbursed to charities within five years. The tax would apply in every year the donor-advised fund fails to make the distribution

Killing a payout requirement entirely may be difficult to accomplish, Sandra Swirski, executive director for the Alliance for Charitable Reform, told Bloomberg BNA June 3.

However, the backlash from community foundations and donors themselves has given groups such as the Alliance some hope that the provision can at least be rolled back, she said.

“I am pretty sure we are not going to see a five-year spend down, but I think what we are doing to see is some type of a time requirement for DAFs to disperse these funds,” she said.

Swirski said the Camp staff has acknowledged that the proposal is “tough,” and has invited interested parties to come back and help to reshape it.

Door Still Open

A Camp spokeswoman confirmed that the committee is still interested in talking.

“When we released the draft, we asked for feedback,” House Ways and Means spokeswoman Sarah Swinehart told Bloomberg BNA May 31. “We are continuing to get substantive feedback from stakeholders. It is important to get all the policy right,” she said.

Of all the provisions in the Camp bill that affect nonprofits, the DAF proposal has turned out to be the most controversial, Harold Hancock, House Ways and Means tax counsel, has said in recent public forums.

He told a conference on tax-exempt organizations in April that one of the policy concerns is that while donors get an immediate deduction for their DAF contributions, there is no rule requiring them to disperse that money to other charities.

Meanwhile, local chapters of charities have appealed to the committee to see more of the donor-advised funds flowing through to them, he said.

Donors Pushed to Private Funds

“Having to distribute all the funds in five years will push donors toward private foundations, and I don’t think that’s the kind of tax policy the staff had in mind,” Steven Woolf, tax policy counsel with the Jewish Federations of Northern America, told Bloomberg BNA June 3.

“We’d love to see the distribution requirement dropped entirely,” Woolf said. “The donations are made voluntarily now and it isn’t something we think ought to be decided by some arbitrary number the government decides.”

Many donor-advised funds currently have no legal minimum payout requirement, but most have guidelines to ensure that they are actively making grants, national DAF program sponsors have said.

Tax deductions for cash contributions to DAFs are higher for donations to public charities than for private foundations, which may be contributing to some of the concern. Donors can deduct up to 50 percent of adjusted gross income when giving to a publicly supported charity, but only up to 30 percent when they give to private foundations.

Payout Rates Touted

Average DAF payout rates have also been criticized, with a 2012 Congressional Research Service report finding an average 13.1 percent payout rate among funds studied in 2008.

Vanguard Charitable Endowment Program

Donor-advised fund managers for some of the largest funds defended their payout records in a May 28 webinar.

Jeffrey Zysik, chief financial officer of DonorsTrust, said that in 2013, his organization’s payout rate was 116 percent, which represented the total amounts granted out in 2013 divided by the average value of all of its accounts. Over its lifetime, DonorsTrust received $680 million into DAF accounts and granted $564.5 million, for an 83 percent lifetime payout ratio. DonorsTrust doesn’t have an issue with respect to payout, he said.

Zysik said because DonorsTrust has a specific mission, it does, however, turn down grant requests that fall outside its mission to “protect charitable intent in support of liberty, in this case limited government, personal responsibility and free enterprise.”

While DAFs are often considered alternatives to private foundations, the Camp proposal is far more complex than the current rules for these organizations, Zysik said.

Benjamin Pierce, president of Vanguard Charitable Endowment Program, said on the webinar along with Zysik that his program has made more than 50,000 grants in the current fiscal year and will give away approximately $600 million from 10,000 accounts.

Pierce said over the past five fiscal years, Vanguard has paid out between 20 percent and 28 percent to charities.

“Why change something that isn’t broken? Why change something that is working?” Pierce said. He added that when a 5 percent payout requirement was put in place for private foundations in the late 1960s, the intention was that would be the floor. Instead, it has become the ceiling. “I would hate for that to happen to donor-advised funds,” Pierce said.