by Randy Fox
Or should I say, moron Madoff. No, I shouldn’t. So, scratch that. However, in my last blog I did disagree with professor Madoff’s latest proposal to reframe the way Donor Advised Funds (DAFs) are treated for tax purposes. She suggests that DAFs receive tax-exempt treatment like other non-profits but that no income tax charitable deduction may be allowed until funds are distributed to “actual” charities.
Let’s examine one or two of the issues that arise from that construct. First, estimate indicate that less than 12% of Americans can itemize their deductions under the TCJA this from the Tax Foundation). Many are being advised to “group” gifts into one year so that they can take advantage of the disappearing charitable deduction. Giving declined by 3.4% last year or $54 Billion. Now, it’s suggested that even this deduction be taken away. This is a dramatic threat to the charitable sector.
Further, if there is to be a delay for the income tax deduction until money is distributed, what are the consequences? Many families utilize the DAF as a means for their family to educate the next generation(s) both about giving but also about financial decision making. It can become the center for family values discussions and a robust communications opportunity. What happens to the income tax deduction when the contributing generation dies? Does it end then? That would force all the funds to be distributed during generation one’s lifetime. Or, if it is to carry over, who receives the deduction? Do the children who now control the fund, each get a proportionate share? Have the parents made a gift of property to their children or do they get this inherited benefit free of tax? After all, a tax deduction is an economic benefit.
The more that this suggestion is examined, the weaker and more unnecessarily complicated it becomes. Like all proposed tax changes, there are consequences and unintended consequences. While many believe a fix to DAFs is not needed anyway, this one sure isn’t a sensible solution.
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