Last week, the Biden administration released its budget proposal for Fiscal Year 2023. While the budget is merely a wish list and it is up to Congress to pass any components, it serves as an interesting look into President Biden’s policy priorities.
Among the tax revenue raisers is a proposal to limit the ability of private foundations to count contributions into a donor-advised fund (DAF) toward their annual 5% payout requirement, unless the funds are granted out by the end of the following year and records are kept reflecting that grant.
This isn’t the first time such a restriction has been floated. It is one of the concerning provisions in the so-called Accelerating Charitable Efforts Act, S.1981/H.R.6595, and has also been addressed by the Treasury Department in past guidance. The perceived abuse this is trying to address is the alleged use of DAFs as an end-run around the restrictions that encumber private foundations, particularly the 5% qualifying distribution requirement. The problem is there’s no evidence to suggest this is a systemic problem and the unintended consequences far outweigh any prophylactic usefulness.
Why does this matter?
Private foundations give to DAFs for many valid, legitimate reasons including:
- To protect donor information when granting to a controversial cause.
- To issue a one-time, off-mission grant, such as COVID-19 relief, without opening the door for further solicitations.
- To train future generations in grantmaking.
- To pool resources with other givers, without burdening the receiving charity with extra administrative work.
- To donate internationally — smaller foundations in particular may not have the resources to comply with paperwork and due diligence requirements. Giving through a DAF allows them to outsource these functions.
- To allow small, private foundations to take advantage of the professional investing advice that a DAF can provide.
For these reasons and others, permitting private foundations to make qualifying distributions to DAFs ultimately encourages charitable giving, putting more money in the hands of operating charities.
Where is the evidence of a need?
The arguments against a private foundation’s use of a DAF are not new. However, a 2020 study by the Minnesota Council of Nonprofits has been cited as a reason to impose such restrictions. The authors chose a small sample of private foundations and examined only those who made a DAF contribution between 2010 and 2018. Even with this small, arguably skewed sample, the study’s authors found only 2% of the analyzed foundations used DAF grants for all of their required payout in a given year. This could have been for a variety of valid reasons, such as a leadership transition within a foundation, but the study has been used to feed into the narrative that private foundations are misusing DAFs to skirt their annual payout requirements. Yet even this study didn’t show evidence of a systemic problem.
The Biden administration estimates its proposal would generate $64 million in revenue over 10 years. That is a drop in the bucket for the federal government, but more importantly, that figure represents resources that could instead be going to charities and the communities they serve. Why take money away from charitable causes without any evidence of widespread abuse of the existing rules?
No reason to punish DAFs
Beyond the irrational limits on how DAFs may help meet foundations’ charitable missions, this proposal is broadly problematic. DAF sponsors are public charities and are recognized as such in statute by Congress. If enacted, this provision would distinguish these charitable giving vehicles from other types of public charities – essentially positioning DAFs as a second-class type of charity.
The fact is, DAFs are so popular because they offer givers of all types the flexibility and accessibility to support causes they care about on a timeline that meets their giving goals. With payout rates consistently around 20%, there is simply no reason to restrict their use.
