Private foundations would be limited in their use of donor-advised funds (DAF) to make annual qualified distributions, under changes included in the new federal budget. The proposed DAF regulation was among several new tax proposals included in President Biden’s $5.8-trillion federal budget for 2023 released March 28.
The proposal would clarify that a distribution by a private foundation to a DAF is not a qualifying distribution, unless the DAF funds are “expended as a qualifying distribution by the end of the following taxable year, and the private foundation maintains adequate records for other evidence showing that the DAF has made a qualifying distribution within the required time frame,” according to “General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals,” otherwise known as The Green Book. “It is not appropriate for a private foundation to satisfy its distribution requirement by making a distribution to a DAF. This use of DAFs can subvert the goal behind minimum distributions by reducing the current charitable use of the associated funds.”
Limiting the use of DAFs to avoid private foundation payout requirements would save the federal government a projected $64 million over the next decade, including $50 million from 2023 and 2027, and $16 million in 2023, according to The Green Book, which provides cost estimates and descriptions for revenue proposals in the federal budget.
Proposals in the Green Book that “lack bipartisan support – or that are part of larger policy initiatives that lack bipartisan support – generally remain very uncertain this year,” according to an analysis by accounting and financial management firm KPMG.
The timeframe in the president’s budget, however, is too restrictive and may limit foundations’ ability to partner with nonprofits and other funders, including community foundations, Council on
Private foundations are subject to a 5% annual payout and failure to meet the minimum distribution requirement is subject to a 30% excise tax on the undistributed amount. Critics say the rule can be easily avoided. The coalition has advocated regulations be enacted to prohibit making distribution to donor-advised funds (DAFs) to meet payout obligations or to avoid private foundation status by funding entities through DAFs.
Between 2006 and 2019, assets held in DAF accounts increased from $31 billion to almost $142 billion, about 356%, according to the Joint Committee on Taxation (JCT). Meanwhile, contributions to DAF accounts increased 331%, from $9 billion to almost $39 billion, as distributions from DAF accounts increased 380%, from less than $6 billion to $27.4 billion. During the same period, total giving in the U.S. increased by 52%.