By Andrew S. Katzenberg
You may desire to be philanthropic, but just handing over money may not be the best way for you to give. There are a myriad of issues that every donor should consider before making a substantial gift to a charity. Here are seven practical considerations for you to keep in mind before donating.
I. Type of Funds
Though a cash donation is the simplest form of donation, it is often preferable to donate appreciated marketable securities. First, this is not much more difficult than writing a check; simply picking up the phone and instructing your broker to transfer X amount of securities to a charity is all it takes. Second, and more importantly, donors receive a deduction equal to the fair market value of the securities, regardless of the basis. This eliminates the capital gains on the appreciation of the securities (which the charity is exempt from paying). The combined state and federal tax savings to the donor may be in excess of 30 percent.
Another type of asset which may be more advantageous to give is the assets from a traditional IRA. All distributions from a traditional IRA are includable in the income of the recipient. However, charities are generally not subject to income tax, and distributions from an IRA to a charity do not incur any tax, which may result in a 50 percent income tax savings (combined federal and state) for the donor. However, only $100,000 is permitted to be distributed each year, and the IRA owner must be at least 70½ years old.
II. Use of Funds
Generally speaking, when you donate to a charity, the charity has control of the funds and discretion on how to use them. However, some donors may prefer to direct the use of the donation for specific purposes. For example, if you donate to a university you can direct that it go to the athletic department or to endow a chair in an academic department.
If you are a donor who prefers more control regarding the use of the donation, not only for the purpose, but also for the actual distribution/use of the donation, consider the use of a grant agreement. Formalizing your intentions and wishes in a grant agreement is the best way to guarantee certainty in the use of the funds. A grant agreement allows you, as the donor, to set specific requirements associated with the donation and the ability to name other individuals who can enforce the agreement after your death. For instance, when creating a scholarship program, you can stipulate the amount of each scholarship, qualifications of recipients, the committee who will select the recipients and the name of the scholarship.
Additionally, a grant agreement that provides for a series of donations over a period of time provides you with more leverage to insure that the charity complies with the terms of the grant agreement. The ability to withdraw and/or cease donation payments is a very strong tool.
III. Giving During Life Rather Than at Death
An often overlooked benefit comes from making charitable donations during life rather than at death. You may want to leave bequests [it’s a noun, alternative is to say bequeath] in your Will to charities that you had an affinity toward, such as religious organizations you were involved in or schools you attended. However, this may make administering your estate more difficult since the charity would be involved and may require involving the attorney general’s office of the state where the Will is probated. It is far simpler drafting and then administering the estate if your charitable donations are completed while you’re alive. Additionally, you get the added benefit of actually receiving recognition and appreciation for your generosity from the charity. Wouldn’t you rather have the president of your alma mater thank you personally rather than thank the executor of your estate?
You should be mindful of requests you attach to donations, since such requests can lead to the rejection of a gift by the charity. For example, when donating a piece of art to a charity, requiring a certain amount of insurance or using specific services to store the art may be too costly in the eyes of the charity. The net result is that neither the charity nor you benefit.
Additionally, placing restrictions and conditions on donations that may seem prudent today may not be in the future. For example, creating an endowment fund for a charity that only permits the use of income may seem reasonable to insure a continued source of funds for the charity. However, if the charity’s overall operating costs and debts exceed its revenue, the charity might not be able to sustain itself in spite of the endowment. This shortfall may not be a result of mismanagement of the charity, but rather of an unforeseen circumstance, such as a downturn in the market or a major capital expenditure due to a natural disaster. The inability to use the principal of the endowment to continue the operations of the charity may result in the charity ultimately dissolving.
Albert C. Barnes’ and Georgia O’Keeffe’s gifts of artwork to the Barnes Foundation and Fisk University, respectively, are perfect examples of restrictions gone awry. In both cases, the donor placed a prohibition on the sale or loaning of the gifted artwork. Additionally, in Barnes’ case, all works of art were required to be displayed in Mr. Barnes’ mansion in Lower Merion, Pennsylvania, and limited the number of days and visitors allowed to view the art each week. These restrictions added to the financial distress of the foundation and the university, so much so that both ultimately had to engage in lengthy and costly litigation to free themselves of the limitations in an attempt gain financial stability.
V. To Be Recognized or Not To Be Recognized
Often associated with major donations is the benefit of naming rights. However, this is not just for the ultra-wealthy for whom buildings and stadiums are named. You may be able to obtain the naming rights of a classroom or hall for a moderate donation. Naming rights can be used to honor loved ones or promote one’s own legacy. Additionally, when discussing naming rights, the length and term of those rights should be carefully considered. Issues such as whether the name should continue if the room or building is renovated or razed and how the name will be displayed are important topics that should be detailed in a grant agreement.
If you want to become a donor, you also should be aware of the political and social views and affiliations of the charities to which you are donating because you will be associated with the charity’s underlying causes. You may prefer that your political and social views be kept private. This desire for privacy could be because of religious affiliations or fears of ostracizing your customer base, which would negatively impact your business.
A grant agreement can be used to prohibit the charities from publicly recognizing you as a donor. However, if you prefer complete anonymity even from the charity itself, you could establish a “donor-advised fund” (“DAF”) to make the donation. A DAF is a fund maintained by a sponsoring organization (for example, a charitable organization) that has legal control over all of the assets in the fund. In these arrangements, separate accounts are maintained within the DAF for each donor who has advisory privileges over the distribution and investments of his or her separate DAF account. So, as the donor, you would contribute to the DAF, and then the DAF would contribute to the charity. The DAF would designate its general account as the source of the contributed funds rather than your specific DAF account. This results in only the institution administering the DAF being recognized for the donation and not you, the underlying donor of the DAF.
You may want to pledge to make donations over a period of years. If you have an established foundation, you should avoid making personal pledges in order to provide greater flexibility in satisfying the pledge in later years. If you have a private foundation, your foundation cannot satisfy your personal pledge because this would be an impermissible use of the foundation’s assets. However, if the foundation makes the pledge, the foundation’s obligation can be satisfied by you personally.
VII. Giving to Foreign Charities
Individuals sometime have interests which expand outside of the United States and desire to give to organizations which benefit global causes. If that describes you and you are considering giving directly to a foreign charity, be aware that you will not receive a corresponding income tax deduction. Alternatively, there are U.S. public charities that conduct their activities in other countries, such as Doctors Without Borders or the American Red Cross. Giving to these organizations will net you both an income tax deduction and the desired use of your donation.
Additional alternatives to donating directly to foreign charities are to donate to an “American Friends Of” organization or a DAF. American Friends Of organizations are U.S. charities, which distribute their funds to the foreign organizations they are named after. DAFs (as discussed above) are also U.S. charities, which allow donors to advise the charity where to distribute the funds. DAFs are permitted to distribute to foreign charities. In both cases, you would be donating directly to a U.S. charity (and indirectly to the foreign charity) resulting in an income tax deduction.
There is no right way or wrong way to give, but as a donor, you should be well informed by your advisers and counsel of the options that exist so you can make the best informed decisions. In the end, just writing a check might be the best option for you.
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— Andrew S. Katzenberg is an attorney at Kleinberg, Kaplan, Wolff & Cohen, P.C. in the Trusts and Estates group, where his practice focuses on wealth preservation, estate and trust administration, nonprofit and tax-exempt organizations and charitable giving.