Every piece of legislation passed by our friends in Washington, D.C., has ripple effects, and President Donald Trump’s “big, beautiful bill,” now under consideration by the Senate, is no exception.

The bill includes a provision that has drawn cross-ideological opposition from the philanthrosphere: increasing the current 1.39% excise tax on foundation net investment income. Under the proposed tiered system, the tax progressively rises for foundations with assets of over $50 million, and tops out at 10% for foundations with assets over $5 billion. What the bill doesn’t do, though, is prohibit private foundations from moving assets into donor-advised funds (DAFs) to avoid being subject to large excise taxes. 

Should the bill become law, the higher excise tax rates may disproportionately hit legacy foundations, which will be generally less inclined to transfer large chunks of their assets into DAFs. Conversely, a subset of foundations — and especially those run by living donors — will seize the opportunity to shunt assets into the popular giving vehicles. If they do, the bill’s passage could be a big, long-term blow to nonprofits that would otherwise benefit from 5% minimum foundation payout rates, versus 0% for DAFs. Meanwhile, it’d also be a pyrrhic victory for Republicans, since the provision may not end up raising the anticipated $15.9 billion in revenues over 10 years that the GOP hopes to use to bankroll the president’s agenda. 

But there’s a way Congress can prevent, or at least slow, foundations’ anticipated exodus to tax-free DAFs. Under current law, foundations can count DAF contributions toward their 5% annual payout requirement. Eliminate this allowance, and it will be more difficult for foundations to use DAFs to manage the distribution requirement and their excise tax bill. Viola! Republicans will have more tax revenues to offset permanent tax and spending cuts.

I admit the prospect of the Republican-led Congress going against the “charity lobby” — including conservative funders that give through DAFs and the financial services industry looking to preserve those assets under management — by preventing DAF transfers from counting to the 5% payout is far-fetched. Legislators have never had much of an appetite for addressing the growing question of what to do about DAFs, and the partisan impetus for the excise tax hike has more to do with targeting large foundations the GOP sees as liberal than with enacting meaningful sector reform. Then again, given the extent to which the populist political movement has produced strange bedfellows, nothing should surprise us.

“In terms of thinking of the unintended consequences [of the excise tax increase], it brings up the question of [whether] private foundations be allowed to treat distributions of DAFs as qualifying distributions to the forefront,” said Brian Mittendorf, an Ohio State University professor who studies nonprofit accounting. “I could see how people who were indifferent to that question in the past may have a different opinion of this question now, particularly members of Congress who are viewing the tax as a way to generate revenue or punish large foundations.”

It’s typically easier for foundations helmed by living donors to move assets to DAFs

A recent report by the Institute for Policy Studies found that private foundations moved $3.2 billion into DAFs in 2022. 

That isn’t a huge number in the grand scheme of things, but remember, those transfers took place under the current system in which foundations must pay a mere 1.39% across-the-board excise tax. The calculus for foundations with over $5 billion in assets will change dramatically if they’re suddenly faced with a 10% rate. “If a foundation wants to distribute appreciated assets to a DAF and it counts as a qualifying distribution, then they’ll be avoiding a lot of those taxes,” Mittendorf said. “When it’s a 10% tax rate, they’ll be strategic about how they manage that money.”

That being said, foundation leaders writ large may not respond in lockstep. Private foundations helmed by living donors like Elon Musk, Larry Page and Stephen and Susan Mandel have a track record of pouring hundreds of millions of dollars of their foundations’ assets into DAFs to hit the 5% payout rate. A sympathetic interpretation would be that they’re somehow too busy to strategically put money in the hands of working nonprofits. And for living donors, the DAF option is straightforward.

“Shifting money currently in a private foundation to a DAF is easier to do when the original donor is the individual running the private foundation and can serve as the advisor to the fund and need not be compensated for any of the work,” Mittendorf said.

The same can’t be said for legacy foundations like Ford, MacArthur and Mellon. “Since advisors to funds cannot be paid by these funds,” Mittendorf said, “it is a bit more difficult to conceive for legacy foundations who are not run by donors but instead by paid staff. I’m not saying that legacy foundations can’t utilize DAFs. They can, it’s just a bit more delicate in thinking about who is appointed as advisor to the funds and what financial transactions they engage in.”

Mittendorf also noted that legacy foundations typically are more active in managing their investments compared to those helmed by living donors, and especially those whose foundations’ assets primarily comprise company stock. As a result, legacy foundations’ investments “do not have as much unrealized capital gains that could be avoided” by transferring assets into a DAF.

Finally, and perhaps most importantly, leaders at legacy foundations thinking about transferring assets into DAFs to minimize their excise tax bill also need to consider the optics.

The public has a mixed perception of our billionaire overlords. On one hand, we envision some of them as a bulwark against Trump 2.0, or hope they’ll put their vast resources to use filling urgent gaps. Then again, we’re also used to their relative stinginess and aren’t necessarily outraged upon learning that, in 2022, Larry Page’s Carl Victor Page Memorial Foundation sent $276 million to DAF sponsor National Philanthropic Trust, accounting for 99.9% of its payout. 

Now, imagine a major legacy foundation moving a large part of its annual charitable distributions to a black-box DAF that has no payout or disclosure requirements. It’s perfectly legal, as the IRS considers a DAF to be a charitable organization, but the outrage from grantee partners and philanthro-watchers would be deafening.

Many of the largest foundations are helmed by living donors

This distinction between how living billionaires and legacy foundations give — or don’t give — to DAFs will have meaningful philanthropic consequences should the excise tax provision become law. 

FoundationMark’s John Seitz recently ranked the top 25 private foundations, most of which fall on the left-of-center side of the political spectrum, by fair market value at the end of 2023. 

Of this group, I counted at least 13 foundations helmed by living donors like Musk, Page, George Soros, Alice Walton, Dustin Moskovitz and Cari Tuna (Good Ventures), and Michael and Susan Dell. This subset of foundations had at least $150 billion in combined assets that could find their way to DAFs.

We shouldn’t paint these living donors with a broad brush. Musk and Page, as noted, have a track record of moving money into DAFs, but a review of the 2023 Form 990s for Good Ventures and the Alice L. Walton Foundation shows that neither entity put a cent into a DAF. 

These foundations, like others in Seitz’s list — Soros’ Foundation to Promote Open Society, the Gates Foundation or the Bloomberg Family Foundation — operate much like their legacy peers by employing a large staff and making hundreds of grants annually. Should the excise tax provision become law, they may honor its spirit by paying a higher excise tax. Then again, the temptation to fund nonprofits through a DAF and avoid a tax hit could be too great to resist.

Gauging the likelihood that legislators will revisit DAF reform

All of which brings us back to the legislative elephant in the room. “If they [Republicans] really want to achieve a revenue outcome with the excise tax, they have to address this question of whether moving money to a DAF counts as a qualifying distribution,” Mittendorf said.

Will they? Past developments suggest we shouldn’t hold our collective breath. 

The proposed Accelerating Charitable Efforts Act, which would have prohibited a distribution made to a DAF from being treated as part of the 5% annual payout unless the DAF makes a qualifying distribution in the same year, stalled out in Congress in December 2022. I haven’t come across any calls to resuscitate the proposal, but if they were to emerge, we can expect a similarly strenuous lobbying effort to defeat it.

It also goes without saying that today’s political landscape looks a lot different than it did in late 2022. The Republican party — dominated by the populist MAGA wing — isn’t uniformly deferential to the financial services industry. Voices on the right have been known to disparage DAFs as “the black box of the nonprofit world.” The president’s tariff policy suggests he doesn’t mind antagonizing Wall Street, and he’s floated the idea of increasing taxes on millionaires. 

Meanwhile, proposals to rein in large foundations tend to have strong public support across the political spectrum — and especially those that could force foundations to put more money into the hands of working nonprofits instead of DAFs managed by big banks. 

All that being said, I still put the odds of meaningful DAF reform in the low single digits. The reason why it isn’t zero is because for today’s GOP, no proposal — much less one that bankrolls the president’s agenda and punishes progressive foundations with a higher excise tax — should be considered outside the realm of possibility. 

“When it comes to potential restrictions placed on DAFs, the ability for foundations to treat gifts to DAFs as a qualifying distribution to their payout was already what I consider ‘low-hanging fruit,’” Mittendorf said. “And if the goal of the bill is to generate more revenue, it seems like it would be even more so now.”