Advisers wary of bill putting timeframe on giving from donor-advised funds

Legislation that would set a deadline for how long money intended for charitable giving can stay in donor-advised funds is drawing skepticism from financial advisers.

Donor-advised funds have become a popular philanthropy tool because investors receive an upfront tax break when they put money or other assets into the vehicles but have an unlimited amount of time to make allocations to charities.

Supporters of DAFs say they allow investors to bundle the equivalent of years’ worth of donations to achieve a tax benefit and then step back and assess which charitable organizations to support. Critics of DAFs assert that charitable intentions are undermined when money sits in the funds indefinitely.

Earlier this month, Sens. Charles Grassley, R-Ia., and Angus King, I-Me., introduced a bill, the Accelerating Charitable Efforts Act, that would create a new kind of DAF in which donors would receive upfront tax benefits but only if the funds were paid out within 15 years. The bill also would establish a 50-year DAF.

“[C]haritable dollars ought to be doing the good they were intended for, not sitting stagnant to provide tax advantages for some and management fees for others,” Grassley said in a statement. “The reform measures we are putting forward will ensure that the incentives for charitable giving actually result in money going to charities.”

But Richard Pon, a CPA and investment adviser in California who has an eponymous practice, was expecting a tighter limit — maybe 10 years — on DAFs than the lawmakers proposed.

“It’s probably too long,” Pon said of the 15-year timetable. “It’s not really helping the nonprofit if [the money in a DAF] sits there for 15 years.”

Joanne Burke, owner of Birch Street Financial Advisors, doesn’t like the idea of restricting the time money can stay in a DAF because donors see them as long-term vehicles.

“People use DAFs as their very affordable foundation,” Burke said. “When you limit that, it may prohibit folks from leaving a legacy.”

Barbara Tarmy, a partner at Williams Jones Wealth Management, said DAFs often serve as the initial portal into charitable giving. The timeline latitude for making grants is helpful to new philanthropists.

“The DAF opens the window and then the givers have time to learn about more charities and give gifts in smaller installments,” Tarmy said. “They’ve designated the money for giving. Let people catch their breath and figure it out.”

Fidelity Charitable and Schwab Charitable are two of the biggest sponsors of donor-advised funds. Officials from each organization said they’re reviewing the DAF legislation and declined to comment.

Fidelity Charitable said that of every $100 put into a giving account, Fidelity’s name for its DAFs, $76 is granted within five years and $89 within 10 years.

Both Fidelity Charitable and Schwab Charitable reported record amounts of giving in 2020 from DAFs they sponsor in response to the coronavirus pandemic.