What do you need to know about the ACE Act?
Tax hikes and reforms are upon us once again. Along with the tax proposals on income tax rates, long-term capital gains and net investment income tax come a set of proposed changes for charitable giving that you will want to be aware of for your clients.
The ACE Act (Accelerating Charitable Efforts Act) is sponsored by Sen. Angus King (I-Me) and Sen. Chuck Grassley (R-IA) and would modify existing rules to donor advised funds (DAFs) as well as make modifications on excise tax and other regulations on private foundations.
As professional advisors, you should know there are significant updates to:
- Restrictions on deductions for contributions to DAFs not within a community foundation
The bill defines “unqualified” and “qualified” DAFs, stating that a “qualified DAF” is one with a written agreement in place that requires the donor’s advisory privilege for any contribution to the DAF to terminate within 14 years following the year of the contribution. To receive a deduction, the donor must—at the time of the contribution—identify a preferred organization that will receive the final balance of the funds upon the termination of the DAF.
If contributions are made to an “unqualified DAF,” four restrictions apply:
- For any non-cash contributions, a donor cannot claim the deduction until the sponsoring organization sells the contributed asset for cash and makes a qualifying distribution.
- For any contribution, a donor cannot claim the deduction until the taxable year in which the sponsoring organization makes a qualifying distribution (or the proceeds from the sale of such contribution). This distribution cannot be made to another DAF and distributions would be treated as made from contributions (and earnings) on a first-in, first-out basis.
- The amount of the deduction would be limited to the amount of the corresponding qualifying distribution.
- Contributions must be distributed within 50 years of the donation, or an excise tax will be imposed on the sponsoring organization—essentially eliminating successor advisors.
Contributions of non-publicly traded assets: No deduction would be allowed for the contribution of non-publicly traded assets to a “qualified DAF” or a “qualified community foundation DAF” until the sponsoring organization sells the asset. The deduction would be limited to the amount of the proceeds and credited to the account of the fund identified with the donor.
- Restrictions on DAFs within a community foundation:
- The bill defines a “qualified community foundation” which ensures all community foundations in the State of Indiana qualify.
- Maximum Value of Advisory Privileges states that no individual with advisory privileges with respect to the DAF can have advisory privileges with on more than $1M, in the aggregate, held across DAFs sponsored by a community foundation.
- The DAF must be established under a written agreement that requires qualifying distributions of at least 5% of the value of the DAF’s assets in each calendar year, similar to current private foundation regulations.
- Private foundation restrictions:
- The bill would not allow private foundations to count payment to family members as administrators of their private foundation as qualifying distributions. However, it does include an exception for administrative expenses paid to foundation managers who are not family members.
- The bill prohibits a distribution made to a DAF from being treated as part of the annual 5% payout (unless the DAF makes a qualifying distribution in the same year). Certain reporting requirements would also be required.
- The bill exempts a private foundation that makes a significant qualifying distribution of 7% or more of the private foundation’s assets (other than its direct-use assets) from the excise tax for that taxable year.
- A limited-duration private foundation as defined by the bill is a private foundation which, at the time of its establishment:
- Has a duration specified in its governing documents of not more than 25 years; and
- Makes no distributions to other private foundations which share a disqualified person in common
- A recapture tax would apply if a private foundation initially meets these requirements at the time it is established but then later fails to meet the requirements at a later date.