The world is full of worthwhile causes – from humanitarian need to climate change. Organizations around the world are working to address the existing need, which may be magnified during periods of conflict. Philanthropists often look for the most effective ways to respond.
For individuals, the Internal Revenue Code (IRC) provides a tax deduction to those who contribute to a “charity” and also defines what counts as a charity. To ensure a contribution is eligible for a tax deduction, a philanthropist must comply with the rules. Those who wish to support non-U.S. causes may face additional requirements. Individuals may receive a charitable deduction for funding a charitable vehicle, such as a private foundation or donor-advised fund (DAF). The IRC and its regulations govern the operation of these charitable vehicles, including permissible distributions to charities.
Many charitable organizations headquartered outside the U.S. also create a U.S. affiliate. The U.S. affiliate makes fundraising more efficient for the organization, as it provides a seamless structure for U.S. citizens to make charitable gifts while taking advantage of an income tax deduction. If a non-U.S. charity has a U.S. affiliate, a gift to the charity through its U.S. affiliate will qualify for a tax deduction. These organizations are often referred to as “Friends of” organizations.
Expenditure Responsibility Through a Private Foundation
If an organization does not have a U.S. affiliate, a charitable gift still may be possible, but an additional layer of due diligence may be required. The exact requirements depend on the charitable vehicle that is utilized. Philanthropists who give through private foundations may support efforts outside the U.S. even without a U.S. affiliate, provided they engage in an enhanced level of due diligence known as expenditure responsibility. Expenditure responsibility means that the foundation exerts all reasonable efforts and establishes adequate procedures to see that the grant is spent only for the purpose for which it is made. It also requires the foundation to obtain full and complete reports from the grantee organization regarding how the funds are spent, and it requires the foundation to make full and detailed reports on the expenditures to the Internal Revenue Service. While this level of due diligence is not overly complicated, it can create an undesirable level of administrative oversight. As such, it may not make sense for small grants.
Expenditure Responsibility Through a DAF
Philanthropists who give through DAFs may support efforts outside the U.S. provided the DAF sponsor exercises the same kind of expenditure responsibility described in the previous section. Although this structure requires the same level of due diligence, the administrative burden is shifted to the DAF sponsor. It is important to note that certain DAF providers are willing to provide this additional layer of due diligence, while others will be unwilling to do so. Many of the DAF providers who are willing to provide expenditure responsibility will do so for grants exceeding a certain amount – so, again, it may not make sense for small grants.
Expenditure Responsibility Through a Conduit DAF
Philanthropists who give directly to charity may consider using a conduit DAF, which is a DAF that is structured primarily for the purpose of shifting the administrative burden of expenditure responsibility to the DAF sponsor. To use this structure, the philanthropist would work with the DAF sponsor to determine whether the project would be an eligible recipient. Once approved, the philanthropist would give directly to the DAF sponsor. The DAF sponsor would facilitate the gift and provide the required expenditure responsibility. There are DAF sponsors that are built expressly to provide this service, and they charge an administrative fee for doing so. The administrative fee typically is reasonable but may not make sense for small grants. A conduit DAF may also be used by a private foundation that does not wish to execute its own expenditure responsibility or by a philanthropist who uses a DAF sponsor that is unwilling to provide expenditure responsibility.
Philanthropists wishing to support charities around the world likely can figure out a way to do so. Our Philanthropic Advisory practice at Brown Brothers Harriman would be glad to help.