May 4, 2006 | Read Time: 4 minutes
In November, the Senate passed a bill that would place new restrictions on donor-advised funds. But because the measure has not been passed by the House, donors and charities face uncertainty about when the new rules might take effect, or whether they will be enacted into law.
Donor-advised funds allow people to donate assets to special accounts, claim a tax deduction, and then recommend how, when, and to which charities the money in the accounts should be distributed.
The funds do not now face many regulations, and some lawmakers worry that the lack of rules could allow the funds to be abused.
Following are the key provisions in the Senate bill affecting donors and groups that manage donor-advised funds:
Aggregate payout. Each organization that runs a fund would be required to give least 5 percent of its aggregate assets — for all individual accounts combined — to charity each year. Most fund officials say their organizations will not be affected by such a requirement; only three groups in this year’s Chronicle survey of 88 donor-advised funds reported payout rates of less than 5 percent.
Gifts to charities outside the United States. The legislation would prohibit donor-advised funds from distributing money to organizations not registered as a charity with the Internal Revenue Service, eliminating grants to organizations outside the United States. The goal is to make sure that money does not go to organizations that support terrorism, lawmakers say. While many funds do not allow donors to earmark money for overseas charities, those organizations that do say they don’t think prohibition is necessary.
Eileen Heisman, president of the National Philanthropic Trust, in Jenkintown, Pa., estimates that about 3 to 4 percent of the organization’s grants go to charities outside the United States every year. “We’re so careful and so meticulous that I’m totally confident if anyone came and looked at it, we would pass every litmus test,” she says.
Noncash gifts. Accounts that keep more than 10 percent of their assets in real estate, nonmarketable securities, or other “illiquid assets” would be required to get a formal appraisal of the value of those assets and then include the value of those assets when they figure out whether they meet the standard of distributing at least 5 percent of assets to charity each year. The goal is to make sure that both cash and noncash donations are subject to similar distribution standards.
The bill would also require distribution of such assets from the fund within three and a half years, no matter the state of the economy. Currently, funds are permitted to hold onto assets like real estate until they are sold, and donors are allowed to determine on their own the best time for the sale.
Stephen D. Maislin, president of the Greater Houston Community Foundation, worries that such a restriction would dissuade donors from giving assets whose values are difficult to ascertain. “Some of our biggest donors have their wealth tied up in private assets,” he says. The foundation has received gifts of land, a vacation house, and an airplane, which resulted in a multimillion dollar account, according to Mr. Maislin.
Limits on transferring assets. Donors would be prohibited from transferring an account’s assets to another charity or another donor-advised fund, with the goal of making sure that donors don’t just move money around for the purpose of getting tax breaks or other benefits.
Officials of donor-advised funds say that such a rule could also have the effect of raising the fees that funds charge for administration and investment management, since groups would not have to worry about losing donors to other, lower-priced funds.
“If there’s no competition,” says Kim Wright-Violich, president of the Schwab Fund for Charitable Giving, in San Francisco, “then there’s no pressure on fees.”
Ms. Wright-Violich also says that some donors may want to transfer accounts for more-practical reasons, such as moving to a different city. “If they lived in San Francisco and they moved to Boston, they ought to be able to move” their accounts, she says. “I think Congress will come to its senses on that.”
Still other officials welcome the legislation, in whatever form it takes.
Currently, says Betsy A. Mangone, vice president of philanthropic services at the Denver Foundation, “we’re acting in a gray area. To the extent that our activities can be defined and agreed upon, the safer and the better we all are. I believe charities in general welcome the scrutiny.”
Jerry J. McCoy, a Washington lawyer familiar with donor-advised funds, echoes her sentiment, but adds that some provisions remain problematic, noting that some of the rules “would be harsher on donor-advised funds than they would be on private foundations.”
Since many donor-advised funds promote themselves as a hassle-free version of a private foundation, the regulations could affect the popularity of the funds, Mr. McCoy and others say.
The donor-advised fund measures were passed by the Senate as part of a comprehensive tax bill. The Senate is now negotiating with the House on a compromise version of the tax bill.
The House’s version included no provisions affecting donor-advised funds or anything related to charities or donors.
