In the ever-changing philanthropy landscape, traditional grantmaking’s limitations are becoming increasingly apparent. As societal challenges grow more complex, the need for innovative and impactful strategies in philanthropy has never been more pressing. This article delves into innovative alternatives reshaping how philanthropic goals are achieved.
The New Paradigm of Philanthropy
Gone are the days when philanthropy was solely associated with simple grantmaking. Today, foundations and philanthropists are seeking dynamic approaches to create sustainable, long-lasting impact. These innovative strategies go beyond mere financial support, intertwining with the core missions of philanthropic entities to effectively address social, environmental, and economic challenges.
Mission-Related Investing
Public charities and operating private foundations have long used mission-related investing. Still, there has been a transformative shift in philanthropic funding from donors and non-operating private foundations. Unlike traditional investments, MRIs align a foundation’s investment portfolio with its charitable goals. This approach not only generates financial returns but also advances social aims. Successful examples of MRIs prove their ability to foster positive change while keeping financial viability.
Recoverable Grants
Recoverable grants offer another innovative tool. These grants are structured as loans to be repaid under agreed-upon conditions, enabling funds to be recycled into new projects. This model enhances the efficiency of philanthropic funding and promotes accountability and sustainability in funded initiatives.
New Structures for Giving
Exploring alternative legal structures like family LLCs, 4947(a)(1) (non-exempt) Charitable Trusts, and social welfare organizations under 501(c)(4) opens new possibilities for philanthropy. These structures offer greater flexibility, operational advantages, and tax benefits, expanding the scope of philanthropic endeavors and enabling more strategic and effective allocation of resources.
Philanthropists often face practical questions when it comes to innovative philanthropy. This includes understanding the intricacies of program-related investments, navigating political activities in 501(c)(4) organizations, and understanding the tax implications of different philanthropic structures. Clear and concise answers to these questions are crucial for making informed decisions.
Here are the top three questions clients ask about alternatives to grantmaking:
- What primary purposes should program-related investments within social welfare activities achieve?
PRIs within social welfare activities should primarily carry out one or more of the purposes specified under section 170(c)(2)(B) of the Internal Revenue Code. These purposes include advancing science, combating environmental deterioration, promoting the arts, supplying relief to poor individuals, and preventing the decline of urban areas, among others. PRIs should primarily serve exempt purposes and not be primarily motivated by generating income or appreciating property.
- How can a 501(c)(4) organization engage in political activity and lobbying while keeping its status as a social welfare organization?
While advocating for the common good and general welfare of the community remains the primary purpose of a 501(c)(4), such organizations can participate in political campaigns and lobbying efforts. However, ensuring that these activities do not overshadow their social welfare aims is crucial. To keep the status of a social welfare organization, a 501(c)(4) should adhere to the following guidelines:
- Avoid making political activities the primary focus of the organization. Although the IRS traditionally used a "less than 50%" standard to decide primary activity, this threshold is not definitive and subject to scrutiny.
- Obtain an IRS determination letter to confirm the organization’s status as a 501(c)(4), assuring that all requirements have been met.
- Engage in genuine social welfare activities that help the community and align with the organization’s exempt purpose. This can include grantmaking or active programs.
- Avoid engaging in substantial private purposes that could disqualify the organization under section 501(c)(4).
- Be cautious of excessive political activity and other non-social welfare activities, as these may affect the organization’s tax-exempt status.
- What are the tax implications and operational considerations when using non-501(c)(3) structures for philanthropy? When using non-501(c)(3) structures for philanthropy, such as 501(c)(4) organizations or family limited liability companies, there are several tax implications and operational considerations to keep in mind:
- Tax Treatment: In the case of family LLCs, the tax on net investment income and other income is passed on to the member. Contributions made to the LLC do not qualify for a charitable deduction for the donor, but grants made by the LLC to charities can be eligible for a charitable deduction. Although there is no gift tax for the donor, transferring the LLC’s assets to a charity is necessary to avoid estate tax inclusion upon death.
- Operational Restrictions: LLCs are not subject to the self-dealing restrictions that apply to private foundations, supplying more flexibility regarding shared employees, space, and resources between the LLC, donors, and other non-private foundation entities controlled by the donor. This offers greater operational freedom compared to a private foundation.
- State Tax Issues: While LLCs are generally disregarded for federal tax purposes, there may be state-level tax considerations to take into account. Understanding the state tax landscape is crucial to ensuring the smooth operations of the LLC.
- Avoiding Private Foundation Rules: By using a 501(c)(4) or an LLC, donors are exempt from the "private foundation" rules outlined in Chapter 42 of the Internal Revenue Code. This can be helpful for those who wish to avoid the restrictions and excise taxes imposed on private foundations.
- Gift and Estate Tax Considerations: Transfers to 501(c)(4) organizations are exempt from gift tax under IRC § 2501(a)(6). However, donors need to plan for the possibility of estate tax inclusion under IRC § 2036 if the assets are still in their estate upon death.
- Use of Non-Exempt Charitable Trusts (NECTs): By forgoing certain tax deductions, it is possible to set up a wholly Charitable Trust that is not subject to the private foundation rules. However, such a trust would be fully taxable and must file a Form 1041 annually. It can serve as a philanthropic vehicle or hold certain assets that pose challenges.
- 4947(a)(1) Trusts: These trusts are treated as private foundations for specific purposes once a charitable deduction is taken with respect to the Trust.
The landscape of philanthropy is experiencing a remarkable transformation. As traditional grantmaking gives way to more innovative and impactful strategies, the potential for creating sustainable change becomes immense. These evolving approaches enhance the effectiveness of philanthropic efforts and inspire a new generation of philanthropists to think creatively in addressing the world’s most pressing problems.
