The $230 Billion Donor-advised Fund Industry is Getting an IRS Hearing

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WASHINGTON (AP) — Congress and the Biden administration are considering what, if anything, should be done to tighten limits on donor-advised funds, an increasingly popular way for donors to set aside money for charity.

Driving the debate is the question of whether the country’s super-rich are abusing the immediate tax breaks they receive by putting money into DAFs, where the dollars can remain indefinitely or, more commonly, until donors decide which nonprofit organizations they want to support. Many in the nonprofit world have resisted that characterization, arguing that the accounts allow for a simple, no-frills style of giving that appeals to both wealthy and average American donors.

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This week, the Internal Revenue Service held a public hearing to discuss its plan to regulate DAFs. The proposals include: Changing the definition of what constitutes a donor-advised fund to apply to a broader range of accounts; Expanding the definition of donor advisors to include personal investment advisors who help manage assets in DAFs; and imposing new penalties on those who misuse the funds. If approved, among other changes, the IRS would impose a 20% excise tax on donations that provide a significant benefit to the donor.

At issue is the IRS’s interpretation of a 2006 law signed by President George W. Bush that established the first comprehensive guidelines for donor-advised funds.

The IRS appears to be concerned that “there are abuses and that money is going where it probably shouldn’t go,” said Lloyd Hitoshi Mayer, a law professor at the University of Notre Dame.

DAF supporters urged the IRS to revise its plan, with some arguing that the proposed restrictions would make donor-advised funds less attractive when charitable giving was already declining. The proposed regulations are just a start; They don’t really address the third rail issue of requiring payout to nonprofits on a specific schedule.

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The IRS proposal comes amid growing concerns about piling up money in DAFs, with some calling for stricter regulations. Nearly $230 billion has been poured into DAFs, which are surpassing private foundations in popularity with a new generation of donors. According to the National Philanthropic Trust, a leading sponsor of the funds, which also publishes an annual report on their growth, there are now nearly 2 million accounts, nearly double the number in 2018. Donors can create accounts with any nonprofit “sponsor organization,” including community foundations.

DAF enthusiasts include philanthropist MacKenzie Scott, who was previously married to Amazon founder Jeff Bezos and has a net worth of around $34 billion. In recent years, she has distributed billions of dollars to nonprofits through DAFs at Fidelity Charitable, the National Philanthropic Trust and the Chicago Community Trust, Puck reported. Fidelity Charitable, founded by financial services company Fidelity Investments, is the largest grantmaker in the country. In 2023, the company donated $11.8 billion to charitable causes, with more than 322,000 donors making grants through its DAF arm.

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In January, Netflix co-founder Reed Hastings donated $1.1 billion in company stock to the Silicon Valley Community Foundation, one of the tech sector’s most popular fund sponsors. SVCF has 1,060 donor-advised funds and net assets of approximately $10.1 billion.

Accounts that are easy to open are also becoming increasingly popular among less wealthy people. Nearly half of all DAFs had assets worth less than $50,000.

More than 70 people lined up outside IRS headquarters in Washington on Monday morning as part of the federal agency’s public hearing on proposed DAF regulations. On Monday, 34 people representing community foundations, fundraisers, legal associations and auditors, among others, spoke about the potential impact of the proposed regulations. Nearly a dozen other speakers spoke during Tuesday’s virtual session. Many expressed dissatisfaction with the IRS plan.

Applying new restrictions and “compliance burdens” to donors and DAF sponsoring organizations could lead to a further decline in charitable giving, warned Lisa Chmiola, speaking on behalf of the Association of Fundraising Professionals. Charitable giving fell 3.4% to $499.3 billion in 2022. But Fidelity Charitable’s DAF distributions rose more than 5% in 2023 to $11.8 billion.

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“Our assessment is that the proposed regulations, if implemented, would result in fewer funds quickly reaching the nonprofit organizations we care about, and we respectfully ask Treasury to reconsider its approach,” added Andrea Saenz, CEO from Chicago Community Trust, one of them, plus the largest community foundations in the country. The IRS is part of the Treasury Department.

The push to include investment advisors in the definition of donor advisors subject to enforcement actions related to DAFs has also been voiced several times. Unlike investment advisors, donor advisors are not allowed to profit directly from the account transactions they oversee.

The language should be removed from the proposal, said Kevin Carroll, deputy general counsel for the Securities Industry and Financial Markets Association, which represents investment banks and asset managers.

A recent public letter signed by a bipartisan group of 33 members of the House Taxation Committee also called the IRS proposal “overbroad” and warned of the potential “chilling effect” that would occur if investment advisers also became donor advisers and the definition of DAFs would be expanded to include certain funds from public charities, such as those that have advisory committees that include donors.

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It’s a change from 2021, when another group of House and Senate members introduced a bill, the Accelerating Charitable Efforts Act, that would have provided immediate tax relief to those who quickly disburse money from their donor-advised funds. The proposal was backed by some big names, including billionaire philanthropist John Arnold, when it was unveiled in 2020.

To the dismay of DAF critics, the IRS proposal does not address the question of whether donors should be required to withdraw their funds within a specific time frame to receive immediate tax relief.

“This is a really big problem, the storage of wealth that people have received deductions for today and is actually not going to help people for who knows how long in the future,” Hitoshi Mayer said.

But it’s not something the IRS and Treasury can address without Congressional action because payout requirements aren’t included in current law, he said.

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Stephanie Beasley is a senior writer at the Chronicle of Philanthropy, where you can read the full article. This article was provided to The Associated Press by the Chronicle of Philanthropy as part of a partnership to cover philanthropy and nonprofits supported by the Lilly Endowment. The Chronicle is solely responsible for the content. For all of AP’s philanthropy coverage, visit https://apnews.com/hub/philanthropy.

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