Community foundations play a unique and longstanding role in philanthropy and, most importantly, in the communities they serve around the country. These organizations help to foster long-term donor relationships and encourage the growth of resources for the direct benefit of local community needs.
As Congress considers ways to encourage and incentivize charitable giving, the role of community foundations is front-and-center in the debate. Below, IACG member and Professor of Law Roger Colinvaux provides a brief description of the carve-out for community foundations in the Accelerating Charitable Efforts (ACE) Act and explains how it covers a significant number of accounts at America’s community foundations.
The ACE Act and Community Foundations
The ACE Act introduces a new approach for charitable contributions to donor-advised funds (DAFs). Under current law, when a donor makes a contribution to a DAF, the donor gets an “advisory privilege” that allows the donor to later provide advice on how the contribution should be spent.
The ACE Act establishes time limits on a donor’s advisory privileges. Instead of having unlimited time to give advice as currently, donors would have either 15 years or 50 years to provide advice for a contribution. With a 15-year time limit, the donor may take an upfront federal income tax deduction (as under current law). Alternatively, with a 50-year time limit, the donor would delay the deduction until the time the advice is given.
The ACE Act contains two exceptions to these time limits for contributions to DAFs sponsored by a qualified community foundation: one for small accounts, and one for endowed accounts.
What is a qualified community foundation?
The ACE Act defines a qualified community foundation as a 501(c)(3) organization that:
- is organized and operated for the purpose of understanding and serving the needs of a particular geographic community no larger than four States;
- serves the needs of the community by engaging donors and pooling donations to create charitable funds to directly support those needs; and
- holds at least 25% of total assets outside of DAFs.
This definition recognizes the historic role that community foundations have played in supporting place-based philanthropy. Today, many community foundations serve a single State or locale within a State. Other community foundations serve a region larger than a State. With a four-state geographic limit, the ACE Act definition accommodates both models of place-based philanthropy. The definition also points to the essential purpose of community foundations to engage donors and pool resources for the benefit of a community. Community foundations do this in many ways, DAFs being one. Thus, the bill’s requirement that at least 25% of a community foundation’s assets are not held in DAFs.
Importantly, the ACE Act places no restriction on the type of needs a community foundation serves – whether it is the general needs of a community, or needs specific to a particular purpose, such as health, education, human services, or religion.
The bottom line: Many of America’s community foundations, including mission-driven organizations within a geographic region, would presumably qualify.
How do the exceptions for DAFs at community foundations work?
- Small Accounts:
- The exception: Under the ACE Act, there are no limits on advisory privileges for qualified community foundation-sponsored DAFs that have $1 million or less, and an upfront tax deduction is allowed for contributions
- How the account is totaled: The $1 million is determined by including all accounts advised by any one advisor to a DAF at the community foundation, and is adjusted for inflation. Thus, if a donor advisor provides advice at two DAFs of a qualified community foundation, each valued at $250,000, the donor advisor could still advise up to $500,000 of DAFs at that foundation and remain within the exception.
- How the exception is applied: The exception is per donor-advisor per community foundation, meaning that a donor-advisor may have multiple exempt $1 million accounts at different community foundations.
- When the account goes over $1 million: If a donor’s contribution causes a DAF to exceed $1 million, only contributions that are above $1 million are subject to the (15 or 50-year) time limits.
- Endowed Accounts:
- The exception: Endowed DAF accounts at a qualified community foundation are also exempt from the ACE Act’s time limits on advisory privileges.
- Definition of an endowed account: An account is endowed if the community foundation requires at least 5% of the DAF to be distributed each year to a public charity or other qualifying distribution, including releasing funds to the community foundation, and also including account administrative fees. This exception reflects that many community foundations endow accounts for donors, and allows for self-enforcement by the community foundation. The bill has no independent payout requirements or excise taxes for endowed accounts.
More information about the ACE Act can be found here.