What Is the Accelerating Charitable Efforts Act?

The Accelerating Charitable Efforts (ACE) Act is a proposed bipartisan bill aimed at reforming the rules for certain charitable giving vehicles. Introduced by Senators Angus King and Chuck Grassley, its primary goal is to ensure that funds donated to these vehicles reach working charities more quickly. The act seeks to address a mismatch between when a donor receives a tax deduction and when charitable funds are put to use. The ACE Act is currently proposed legislation and has not been enacted into law, but it suggests significant changes for donor-advised funds and private foundations.

Proposed Changes to Donor-Advised Funds

The ACE Act proposes a significant restructuring of how donor-advised funds (DAFs) operate by creating new categories of DAFs, each with distinct rules. Under current law, DAFs do not have a minimum annual payout requirement. The proposed legislation aims to change this by tying the timing of a donor’s tax deduction to how quickly the funds are distributed to charities. This approach is intended to accelerate the flow of money from DAF accounts to the nonprofit sector.

A central feature of the proposal is the creation of a “15-Year DAF.” In this model, a donor who contributes to the fund would receive an immediate income tax deduction. The requirement is that all funds within that account, including any investment growth, must be fully distributed to a qualified charity within 15 years of the original donation date. Failure to distribute the funds within this timeframe would result in a 50% tax on any amounts remaining.

For donors seeking a longer timeframe, the legislation proposes a “50-Year DAF,” which functions more like an endowment. With this option, funds can be held in the account for up to 50 years. The difference lies in the tax treatment for the donor, as the income tax deduction is delayed until the funds are paid out from the DAF to a charity. This structure also mandates that these DAFs must distribute at least 5% of their assets annually.

The ACE Act also includes a specific carve-out for DAFs held at community foundations, defined as organizations focused on the needs of a specific geographic area. Under the proposal, a donor’s DAF account with a balance of $1 million or less would be exempt from the new 15-year and 50-year rules. This is provided the community foundation itself meets an overall 5% annual payout rate across its DAF accounts.

A final, important change concerns what counts as a qualifying distribution. To ensure funds are moving to their final destination, the act specifies that a transfer from one DAF to another would not be considered a qualifying distribution. This rule is designed to prevent funds from being perpetually shifted between DAF accounts without ever reaching an operating nonprofit.

Proposed Changes to Private Foundations

The ACE Act also proposes significant reforms for private foundations, focusing on their annual payout requirements and qualifying expenses. Currently, private foundations are required to distribute approximately 5% of their assets for charitable purposes each year. The proposed legislation would tighten the definition of what counts toward this 5% minimum to ensure more funds are directed toward genuine charitable work.

One of the most specific changes involves administrative expenses paid to family members of the foundation’s founder or substantial contributors, considered “disqualified persons” under tax law. The ACE Act proposes that salaries, travel expenses, and other payments made to these individuals would no longer be counted as part of the foundation’s qualifying distributions. This change would compel foundations to increase their grant-making to meet their annual obligation.

Another reform targets the interaction between private foundations and DAFs. Under the proposal, a grant made from a private foundation to a DAF would not count toward the foundation’s 5% payout requirement. This provision is designed to prevent foundations from satisfying their distribution mandate by simply moving assets to a DAF, where the funds could potentially sit without being distributed to a working charity.

To encourage foundations to increase their giving beyond the minimum, the ACE Act introduces a powerful financial incentive. The bill proposes to waive the 1.39% excise tax that private foundations pay on their net investment income. To qualify, a foundation would need to distribute 7% or more of its assets annually. A similar exemption would be available for foundations established with a limited lifespan of 25 years or less.

Tax Deduction Modifications for Donors

A significant new rule for donors involves contributions of complex or non-publicly traded assets, such as restricted stock, real estate, or interests in a private business. Under the proposed legislation, a donor contributing such an asset to a charitable intermediary like a DAF would not receive an immediate tax deduction. Instead, the deduction would be delayed until the charitable organization sells the asset. The amount of the deduction would be based on the cash proceeds received from the sale, ensuring the tax deduction is tied to the actual funds that become available for charity.