With popularity comes criticism, and this is certainly true of donor-advised funds. But don't turn your clients away from one of the most effective tools for charitable giving because of regulatory uncertainty. There is a long road ahead as lawmakers and regulators try to understand the reality of DAF and distinguish fact from fiction.
In mid-November, the Treasury Department and Internal Revenue Service proposed regulations that fundamentally redefine DAFs, and by the close of the comment period on February 15, more than 100 individuals and organizations had submitted comments expressing their concerns. . Reactions ranged from surprise that specific arrangements between donors, advisers and DAF sponsoring organizations could be treated as DAFs, to fear of the potential negative impact of regulations such as these on charitable giving as a whole.
Now that the comment period for this proposed regulation has closed, we expect Treasury and IRS officials to spend the next few months digesting the letters they received, comparing them to current law and practice, and deciding next steps. Will they fundamentally change the proposed regulations or only change at the margins? Given the volume of opposition and concern with the regulations, and indications from Treasury officials that they were broadly written and intended to be narrow, it would be surprising if they chose the latter. But the government has surprised us all before.
New data
Fortunately for the DAF world, new data was released last week that refutes the negative assumptions about DAFs that support the proposed regulations and highlight the flexibility and efficiency of the vehicle provided. In the largest fund-level study of DAFs, researchers with DAF Research Collaboration found promising trends that not only point to high payment rates and quick response, but also to how the use of DAFs evolves over their lifespan. As Treasury and the IRS consider how broadly to define the types of arrangements subject to statutory penalties, these the new data will serve as a good reminder how DAFs work and who will be affected by the new rules.
What is expected next?
The immediate question now is, what happens next?
Well, those aren't the only topics the Treasury and IRS will be grappling with in the DAF space. In late 2017, the Treasury Department issue an announcement signaling their intention to write more regulations around other uses of DAFs, including pledges and allocations, the use of DAFs by private foundations, and the use of DAF gifts to meet the public support test for trust status public charity. Since the announcement, the Treasury Department has been quite busy with other agenda items and we have not seen any progress. However, we may see this next round of proposed regulations soon in an attempt by the Treasury to seek even more feedback from the sector before finalizing any regulations affecting a given vehicle. If that's the case, we're likely to see another round of impressive responses, from DAF sponsoring organizations and the donors who use them, as well as grantees and other nonprofits affected by the rules.
As the executive branch continues its rulemaking efforts, we may also see Congress attempt to make changes to DAFs and how they are taxed. In 2021, Senators Angus King (I-ME) and Charles Grassley (R-IA) introduced the Expedited Charitable Efforts (ACE) Act. which would have made many negative changes in charity and charitable giving, including establishing new payment requirements for DAFs and limitations on deducting gifts to them. The bill landed with little fanfare, gaining no more than an additional co-sponsor in the Senate, largely due to a lack of evidence supporting the need for such sweeping changes in philanthropy. While new or modified efforts may be made this year to reform DAFs and other philanthropic vehicles, the election year will make it difficult for any legislation to move beyond what is required to keep government running. However, DAF stakeholders will need to push these types of proposed reforms with legal arguments, evidence, and data to prevent federal policymakers from irreparably damaging the growing charitable giving tool. fast in the United States.
There is a compelling story to tell as policymakers consider “what's next” for DAFs, and their continued use and impact will help make that story stronger.