In November 2023, proposed regulations regarding donor-advised funds (DAFs) were issued by the U.S. Department of the Treasury and the IRS. These proposed regulations interpret Section 4966 of the Internal Revenue Code, providing additional guidance on key areas first defined in the Internal Revenue Code by the Pension Protection Act of 2006. As is typical, interested parties were allowed to submit comments for consideration on the proposed regulations. Outlined below is a summary of some of the key points in the commentary submitted by Fidelity Charitable, as well as some additional considerations for those watching the legislation. Fidelity Charitable will continue to monitor the proposed regulations and will provide updates of additional resources and guidance as needed.
What happens now that all interested parties have submitted their comments?
- These regulations have merely been proposed. Now the Treasury and the IRS will assess all of the comments and reflect on potential changes.
- Many factors, including the high volume of comments as well as the prioritization of other IRS and Treasury regulatory concerns, will impact the amount of time it takes the IRS and the Treasury to potentially enact the regulations. Accordingly, it will be a significant challenge for regulators to finalize this proposal before year-end.
What are some of the specifics of the proposed regulations and the Fidelity Charitable commentary?
You can see the full comments submitted by Fidelity Charitable here. Some highlights of the perspective outlined by Fidelity Charitable on key aspects of the regulatory proposals include:
- DEFINITION OF DONOR-ADVISOR
A “donor-advisor” would be broadly defined to include personal investment advisors who manage a donor’s personal and DAF assets. These personal investment advisors would be prohibited from receiving payments from donor-advised funds.
Commentary: The expansive definition of “donor-advisor” mischaracterizes the relationship between the sponsoring organization and an investment advisor retained by the sponsoring organization. Investment advisors provide a service to and on behalf of the sponsoring organization, such as Fidelity Charitable, rather than to the donor.
Furthermore, appropriate protections against abuse of compensation to investment advisors already exist through Section 4958. Payments to investment advisors managing DAF assets are currently limited to no more than fair market value.
- DEFINITION OF DISTRIBUTION
A “distribution” would be broadly defined to include fee-for-service arrangements made to non-charities. The broad definition of a distribution subject to penalties could prohibit a range of legitimate expenses from being paid from an individual DAF account. An example of this could include payments to vendors, such as an appraiser, accountant, attorney, or auditor, related to receiving contributions of property into that DAF account.
Commentary: The definition of “distribution” should not reach reasonable expenses supporting a sponsoring organization’s charitable mission, even when allocated to individual donor-advised funds.
A consequence may be that the charities sponsoring DAFs could increase fees to all of their DAF accounts to compensate for the small number with complex contributions necessitating vendor payments.
- EFFECTIVE DATE
The proposed rules would “apply to taxable years ending on or after [the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register].” Accordingly, if the final rules are published on or before June 30, 2024, for an organization with a tax year ending June 30, the applicability date appears to give retroactive effect to the rules back to July 1, 2023.
Commentary: This retroactive application of these regulations is unusual. Fidelity Charitable suggests that the final regulations be proactive, providing a reasonable transition period for the charities that sponsor DAFs to comply.
What is the impact on the Charitable Investment Advisor Program (CIAP) offered by Fidelity Charitable?
Currently, there are no changes to CIAP, as these are only proposed regulations. If final regulations require us to amend or augment CIAP, we expect the final regulations will provide for a reasonable implementation period to enable us to do so thoughtfully.
