Community foundations are quarreling over whether they would be helped or hurt by a bill that would impose sweeping changes in the way donor-advised funds work.
The provisions of the Accelerating Charitable Efforts Act that would affect community foundations are part of a broader package of proposed changes intended to increase the amount of money distributed from private foundations, community foundations, and donor-advised funds to working charities.
There are hundreds of community foundations across the country, with at least one in every state. Widespread opposition among community foundations would create substantial a headwind against the bill in Congress.
The bipartisan proposal is sponsored by Sen. Angus King, an independent of Maine who caucuses with the Democrats, and Sen. Charles Grassley, a Republican of Iowa. Bipartisan sponsorship is expected soon in the House as well.
Steven G. Seleznow, CEO of the Arizona Community Foundation, did not mince words in his opposition to the bill. “We think it’s a direct attack on community foundations and what we do in our communities,” he said.
A supporter of the legislation, Gerry F. Roll, executive director of the Foundation for Appalachian Kentucky, countered that people trying to sink the bill are spreading misinformation and using “scare tactics” to drum up opposition.
Here’s a look at the key issues that have divided community foundations and their advocates.
Speeding Up the Flow of Dollars to Charities
One of the primary goals of the legislation is to encourage people who deposit money in donor-advised-fund accounts to distribute those funds faster to working charities.
It would require that money deposited in donor-advised funds be distributed to working charities within 15 years for the donors to take an immediate tax deduction. The donor would be required to name a charity to receive any leftover funds at the end of 15 years, and the sponsor of the account would have to make that distribution or else pay a tax penalty.
Under current law, people who deposit money in donor-advised-fund accounts can take a tax deduction in the same year they make contributions, and they can wait as long as they wish to direct the money to charity. Donor-advised fund accounts are managed primarily by community foundations and by gift funds affiliated with commercial financial services companies, such as Fidelity Charitable and Schwab Charitable.
The bill includes some key exceptions for community foundations that were included to win their support.
What supporters like: The bill preserves the up-front tax benefits for donor-advised-fund account holders who agree to distribute the funds within 15 years, while imposing less attractive tax benefits for those who don’t. Supporters say that change would create a powerful incentive for donors to choose the 15-year payout option, sending money to working charities faster.
What opponents dislike: No longer enjoying unlimited time to make a gift, many donors would stop giving to charity, or would give less, opponents say. Another possible outcome: Donors would take their gifts directly to working charities rather deposit it in donor-advised-fund accounts managed by community foundations, depriving the community foundations of the fees they get from managing those accounts, and taking them out of the process of helping donors decide the best uses of their money, opponents say.
Exemptions for Community Foundations
For community foundations only, the bill would exempt donor-advised-fund accounts of $1 million or less from any payout requirements. The exemption would continue even if the value of an account rises above $1 million with investment gains.
For donor-advised fund deposit of more than $1 million at community foundations, the donors would have to distribute at least 5 percent annually.
The bill would impose different requirements on donor-advised-fund account sponsors, like Fidelity Charitable and Schwab Charitable. Those accounts would be required to distribute all deposits within 15 years for the donor to take an up-front tax deduction.
What supporters like: Community foundations would get a big advantage over gift funds affiliated with commercial financial-services companies.
The broad exemption for deposits of less than $1 million would exclude from any payout requirement the vast majority of donor-advised-fund accounts managed by community foundations. For deposits of more than $1 million in accounts managed by community foundations, the 5-percent annual payout requirement still leaves plenty of opportunity for those accounts to grow and last for decades.
What opponents dislike: They say granting special exemptions for community foundations would create a divide pitting different kinds of philanthropic groups against one another. They also complain that the exemption for community foundations would create complicated new accounting requirements that would be especially onerous for small community foundations (more on that topic below).
Family Legacy Giving
Supporters and opponents disagree over whether the bill would hurt efforts by major donors to create a legacy of giving for their heirs to carry on.
What supporters like: Ray Madoff, a Boston College law professor who is one of the intellectual architects of the Accelerating Charitable Efforts Act, says that even the larger donor-advised-fund accounts at community foundations would face only a 5-percent annual payout requirement, a threshold low enough to allow decades of giving, assuming typical market returns on investments.
What opponents dislike: Seleznow, of the Arizona Community Foundation, disagrees with Madoff. He said the 5-percent payout requirements for donor-advised-fund deposits of more than $1 million would “wipe out intergenerational giving” for those larger donors who want to create a philanthropic nest egg to pass on to their children and grandchildren. The distribution requirement could leave those donors’ heirs with little or nothing left to distribute decades later, he said.
Defining a Community Foundation
The bill would exclude any organization with more than 75 percent of its assets in donor-advised funds from the community-foundation exemptions.
What supporters like: Madoff says this provision is designed to assure that the organization has funds to fulfill its charitable mission and also to prevent gift funds affiliated with commercial financial-services companies from creating satellite offices masquerading as community foundations to take advantage of the special exemptions for community foundations. Any “true” community foundation should either meet this requirement already or be able to do so relatively quickly, Madoff said.
What opponents dislike: Jeff Hamond, who leads the Community Foundation Public Awareness Initiative, an advocacy group that represents about 150 U.S. community foundations nationwide, said the provision would exclude scores of true community foundations, especially relatively young but fast-growing ones that haven’t been around long enough to build up a large amount of non-donor-advised fund capital. The community foundations in Atlanta, Las Vegas, Washington, and Houston are among those that wouldn’t qualify for an exemption under the bill, he said.
Regulatory Burdens
The bill would require community foundations to monitor disbursements from larger accounts — those created with deposits of more than $1 million — to ensure they are paying out at least 5 percent of the balance annually.
What supporters like: Gerry Roll, of the Foundation for Appalachian Kentucky, noted that the bill exempts all existing accounts. As for new accounts, only deposits of more than $1 million at community foundations would be subjected to tracking, and even that will be easy, it’s just a matter of looking at those account once a year, and if they haven’t distributed 5 percent, the community foundation can nudge the donor or make a distribution itself to meet the requirement, she said.
“There’s nothing we’re going to have to do differently,” she said. “It’s garbage. It’s a scare tactic. There is no additional accounting.”
What opponents dislike: They say that many community foundations currently don’t track donor-advised fund accounts the way the legislation would require, and that the requirements would be especially burdensome for small community foundations. “Our system isn’t currently set up to do it this way,” said Katie Allan Zobel, CEO of the Community Foundation of Western Massachusetts.
