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Advising Clients on Charitable Gifts and Global Philanthropy

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April 11, 2013

Charitable giving to international philanthropies has been growing in recent years, especially as the economy slowly recovers from the recession, but much uncertainty remains over charitable deductions and financial planning, which accountants can help their clients overcome.

From 2010 to 2011, international giving by Americans increased 7.6 percent to $26.7 billion, amounting to 8 percent of total donations. I talked with Eileen Heisman, president and CEO of National Philanthropic Trust, one of the top 25 grant-making institutions in the U.S., to get her perspective.

“We’ve been doing grants globally since 2001,” she told me Tuesday. “We’ve given about $22 million away to about 70 places. It’s been an exploding part of our business. And when we got permission from the IRS to give international grants in 2001, we had no idea that the interest in global philanthropy would take the trajectory that it has. It has been remarkable.”

Eileen Heisman

Heisman believes the world has gotten smaller because of cable news, the Internet and social media. “Our ability to get information really quickly about things that are happening all over the world, and the speed at which we get it, is even faster now than five years ago,” she pointed out. “People are seeing needs, Americans especially, and they want to respond to them. Because a lot of these needs are in developing countries, these vehicles of ways to respond to them are really important. So we were happy to be able to do that.”

NPT has made nearly 73,000 grants totaling almost $1.7 billion to charities all over the world. The IRS basically provides groups like NPT with two ways of making a grant directly to a global organization, Heisman noted: through an expenditure responsibility or an equivalency determination. With an expenditure responsibility, the organization will be vetted beforehand to make sure there are no terrorist activities, ask them what they are going to spend the money on and see who is in the leadership.

“We get them to fill out a questionnaire,” Heisman explained. “They can’t pass the money on to another entity. If they don’t use it all for the exact way in which it was intended, they have to return the difference. They have to go through a report a year later on what happened with the money and what they spent it on.”

With an equivalency determination, NPT needs to determine whether the entity is equivalent to a U.S. charity. “That’s a bit more complicated,” said Heisman. “We don’t do that as often.”

However, recently an organization in San Francisco, NGOsource, received permission to make an equivalency determination collectively on behalf of other U.S. grant-making entities, streamlining the process. “Many grant makers or people who want to give can now use that determination without each place having to do it on its own,” said Heisman.

More commonly, though, NPT uses the expenditure responsibility method. “We have donor-advised funds here, and we’re willing to do all the work and take on the risk because technically and legally we’re making the grant,” said Heisman. “So we do expenditure responsibility, and it works out well for donors who have donor-advised funds with us. But most people don’t have a donor-advised fund at NPT, so they have to figure how they want to do it. The most common way for the average person to make a grant globally is to find a domestic charity that will support that global cause.”

Typically this is done through what are colloquially known as “friends of” organizations. An American charity will be known as a “friend” of an organization abroad, such as Oxford University in the U.K. or the Louvre in France.

“Most large global charities have an American ‘friends of’ organization, and then a U.S. citizen can give to that ‘friends of’ organization, which is actually a U.S. charity, and then they get their deduction that way,” said Heisman. “Then it’s that charity’s responsibility to get the money overseas to wherever it is going. And they have a U.S. board, and the U.S. board has to determine what they want to do with it. But the whole purpose of the organization is to support that entity in another country, so almost all the time that money gets to its destination, unless something heinous has happened.”

If a donor has only a small amount of money, but is interested in helping with a particular problem, they need to find a U.S.-based organization that is good at working on a specific cause in other countries. “If you’re interested in microlending in developing countries, you can go to Kiva.org and see if there are people or projects you want to support,” Heisman recommended. “There’s a Global Fund for Women that does a lot of interesting grants in places all over the world that help women. There’s the Grameen Foundation, and Accion is another microlending organization. So you can find one of those entities and give money to them, but if you’re just going to give $25 or $100, you can either do the Kiva model, where you can actually assign it to a project, or just find one of those charities that helps global causes and give them an unrestricted gift, knowing that you’re helping people in other countries. Doctors Without Borders is a great one, or Partners in Health does a lot with global health. It’s not the same as picking a single charity and having a donor-advised fund grant to support it, but if it’s a reputable charity that helps entities around the world, you can know that your smaller gift is going to good use. But it’s very hard to earmark a smaller gift for a specific place.”

One of the challenges for many overseas charities is communicating its needs clearly in English to grant-making organizations that could help them. They often need to have a translator working with them to understand the grant-making organization’s demands properly.

“If it’s a large organization like a university, they usually have English-speaking people and it’s pretty easy for them to do it,” said Heisman. “But, as with domestic charities, the smaller the charity, the fewer the resources they have and the more difficult it is to get people to follow the directions for the requirements that we need. There’s an inherent kind of inequity because it’s a smaller organization and they need the money, but unfortunately it’s a chicken and egg problem. The money we give them might help them get what they need, but on the other hand if they don’t have the resources to fill out the forms, they can’t get the money. So hopefully they have access to sophisticated assistance so they could navigate through the kinds of questions that we would have to ask them.”

One of the growing sectors that Heisman sees in global philanthropy is environmental philanthropy. Religious philanthropy, on the other hand, has been shrinking.

Other charitable areas that have been seeing increases, according to the Giving USA Foundation, include giving to educational organizations, human services, health organizations, public-society benefit organizations, international affairs, animal organizations, in-kind gifts to patients in need, and arts, culture and the humanities.

Many charitable groups are concerned about possible caps in charitable deductions as lawmakers seek to reduce the federal budget deficit. The Obama administration unveiled its budget blueprint on Wednesday, proposing limits on tax breaks for the wealthy and large corporations, which could affect charities (see Charities Worried about Obama Budget Plan). Heisman hopes the charitable deduction will be off-limits to the cutbacks.

“I wish that they would consider the deduction sacred and not touch it,” she said. “It’s been untouched for 100 years, so why start now? Once you start, it becomes fodder for other manipulation. Once you lose it, it’s very hard to get it back permanently. My vote is to leave it the way it is. I don’t think the government can come near what the charitable sector does with the resources that it has. There is no substitute for the lost services if they start collecting extra tax revenue. I really don’t think you should start balancing the federal budget deficit on the backs of charities. It’s not a Republican or Democratic issue. On both sides of the aisle, there’s a lot of agreement about this.”

For accountants who want to help their clients make sure their charitable deductions count, Heisman has some advice.

“I say to people to make sure your clients are keeping really good records on all their charitable gifts,” she said. “I think a lot of people get really sloppy about it. And make sure they’re not counting deductions for auction items. If they went to a gala, there’s a part of the deduction that’s not allowable. Just make sure that they know that just because they gave to a charity, it doesn’t necessarily mean that it’s deductible. People try to deduct their kids’ tuition because it’s to a university. That’s not deductible. The accountant needs to be really clear on what’s deductible. They may need a little cheat sheet for their clients to say, ‘Here’s how deductions work. This is what’s deductible, this is what’s not. Keep really good records.’ I have a little old-fashioned manila folder on my desktop right off of my kitchen, and anytime I make a charitable gift, I print out my deduction and throw it in there.”

For online donations, she keeps a folder in her email account for records of her donations, and at the end of the year, she can refer back to them.

The average person may not be keeping a close eye on tax policy on deductions, so it’s a good idea to set up a Google Alert on charitable giving and IRS charitable deductions, Heisman suggests.

“Toward the end of the year, if they do change it and you have clients who are high net worth and may be helped or damaged by what change it is, you might want to look at your particular clients who could be affected and give them some advice,” she said. “They may want to give more toward the end of the year or wait until the next year.”

Last year, with worries about changes in tax policy because of the impending fiscal cliff, there was a groundswell of charitable donations. In the end there was no major economic disaster from Congress’s temporary trip over the fiscal cliff, but Heisman noted that it’s still important for charitable donors and their accountants to understand the effects of any changes in what can be deducted.

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