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Avoiding Five Scary Situations in Philanthropy

October 25, 2016

Most of us think of all the positives related to being a philanthropist- giving away money for good purposes, attending events with others who have like-minded goals, serving the community, etc.  Philanthropy can create a tremendous amount of good in the world, if it is done correctly.  However, if you engage in philanthropy ignorantly and without following the law or best practices, you can create more trouble for yourself and a lot less good.  Below are five scary situations in philanthropy and strategies for avoiding them:

1. Believing that money you donate is yours to control

Although you can donate money to your charitable organization, donor-advised fund, or private foundation, the money that you donate ceases to be yours at the moment you donate it.  Because donating money for charitable purposes entitles you to a deduction from your taxes, your donation automatically costs the government tax revenues.  As such, the donation is not really just your money but also the lost tax revenues.  While you can restrict your donation to a specific activity or program, you cannot benefit directly (outside of the tax deduction) or spend the money freely as though it is your own.

2. Failing to follow charitable registration and nonprofit laws

The IRS and state attorney generals regulate charitable organizations.  Nonprofits must apply for federal tax exemption from the IRS and complete annual tax returns known as 990s, if revenue exceeds a certain amount.  Additionally, each state and the IRS requires nonprofits to register as an organizational entity in the state in which they operate and some states require registration for fundraising activities conducted in their state- even if the nonprofit does not have an office there.  Checking with the secretary of state and attorney general for the states in which you operate or fundraising significantly is a good practice.

3. Ensuring a return on your investments

Giving back to charity is not about financial gain, but it definitely should be about seeing your gifts of both your money and your time creating positive impact in the community.  With almost two million charitable organizations operating in the US alone, you want to make sure that the ones that you support are good stewards of your resources and are indeed making progress resolving the issues that concern you.  The best way to do this is to ask questions about the nonprofit’s goals and outcomes or achievements.  

4. Not Having Directors and Officers Liability Insurance

Nonprofits are not immune or exempt from law suits.  If you serve on a board of directors or operate your own charitable organization (either a public charity or a private foundation), it is critical that the organization on whose board you serve or operate has Directors and Officers Liability Insurance.  This insurance ensures that the personal assets of board members and senior leadership staff are protected in the event that a lawsuit occurs and is generally relatively inexpensive for the peace of mind that it offers.

5. Not Seeking Counsel Related To Your Philanthropy

Numerous philanthropists including Bill Gates, Andrew Carnegie, Tom Brokaw, and John D. Rockefeller have indicated that making money is far easier than giving it away appropriately and effectively.  In order to obtain the most financial advantages to your giving, consulting a financial advisor and/or an estate planning attorney is a smart decision.  With regards to determining effective charities, creating your own nonprofit or private foundation, or establishing a donor-advised fund, a philanthropic advisor can save you both time and money, while helping you create the most good.

Giving away money is rarely an easy task and requires care, consistency, and knowledge of best practices in both nonprofit management and philanthropy.