As we turn the page into a new decade and consider the future of philanthropy, we might expect to see blurring lines, and it is a good thing! In other words, as families are increasingly global, the geographic lines that once dictated grantmaking continue to blur. The line between investing and grantmaking is becoming blurry as philanthropists try to ensure their investments align with their purpose. And as clients consider their legacy in an integrated way, the line separating philanthropy from other aspects of life is becoming blurry. In this article, we explore several instances of this “blurring” and provide examples for how philanthropically minded individuals can embrace this blurring in their giving and investing plans.
Blurred Geographic Lines – Cross-Border Giving Likely to Continue
From the Gold Rush of 1849 to the Bakken Boomtowns of 2006, Americans have demonstrated a willingness to move in pursuit of opportunity. Although recent data suggests that geographic mobility in the U.S. has been declining generally, families of affluence in the U.S. and around the world continue to be mobile. People with wealth may move for any number of reasons – opportunity, political stability, favorable tax structure, lifestyle – and recent studies suggest that the wealthiest people in the world are also the most mobile.
Multinational philanthropic families will often seek opportunities to engage in cross-border giving. In fact, charitable giving outside of one’s home country is a growing segment of philanthropy. Cross-border giving is not without its challenges, regardless of the philanthropic vehicle that is used. For example, U.S.-based philanthropists cannot give directly to a foreign organization and receive a tax deduction.
There are, however, several options to help U.S.-based philanthropists meet their cross-border giving goals in a tax-friendly way, including affiliate organizations, expenditure responsibility and equivalency determination. The most efficient strategy is granting to an affiliate organization. An affiliate organization, often known as a “friends of” organization, is structured in the U.S. as a fundraising platform and provides tax deductibility for U.S.-based philanthropists. If granting to an affiliate is not an option, philanthropists who want to engage in cross-border giving through their private foundation or donor advised fund may use expenditure responsibility (ER). ER is an enhanced level of due diligence designed to ensure that each grant is used as intended. Another option is making an equivalency determination (ED), the process through which a determination is made that a foreign grantee is the equivalent of a U.S.-based charity.
A decade ago, many philanthropists struggled with the ambiguity and infeasibility of these additional requirements in their attempt to meet their cross-border giving goals. Two changes have made it easier. First, in recent years, the IRS has provided clarifying guidance on the specific requirements for both ER and ED. The clarifying guidance has helped philanthropists ensure compliance. Second, a cadre of partners and vendors who will complete the necessary due diligence has developed. These third-party providers have allowed philanthropists to focus on what they care about – grantmaking – while outsourcing the compliance.
In the coming decade, wealthy families likely will continue to move to cross-border locations. Driven by the recognition by multinational families of need across the world, the interest in cross-border giving will continue and increase. As a result of this increased interest, the IRS is likely to provide additional clarifying guidance. Further, market providers will work to develop solutions that help multinational families accomplish their goals. As a result, multinational philanthropist families will be better positioned to accomplish their philanthropic goals regardless of geographic lines.
Blurred Lines Between Grantmaking and Investing
Philanthropists often address society’s most pressing challenges through their grantmaking. They make grants to charities that work toward addressing issues such as climate change, hunger and limited opportunities through arts and education. Increasingly, though, philanthropists are taking a broader view. Instead of focusing solely on grantmaking, philanthropists may try to further their philanthropic goals through their investment returns, thus blurring the line between grantmaking and investing. While traditional investments solely seek financial return, philanthropists may seek investments where there is a potential for positive social impact in addition to financial return.
There has been a growing interest among philanthropic investors around environmental, social and governance (ESG) investing. ESG investing involves assessing environmental, social and governance criteria – such as climate change risk, labor practices and risk management – and incorporating these qualitative criteria into the decisions relating to investment selection and the portfolio construction process. The focus on qualitative criteria slightly blurs the line between grantmaking and investing. However, ESG investing is profit-oriented, and investors should not expect to sacrifice return by using this approach.
Impact investing is an evolving practice that seeks to generate positive social impact and positive financial return. It involves direct investment in a company with an intent of having an impact on a specific cause (for example, making an investment in a for-profit safe drinking water company in Africa). The extent to which impact investments weigh and prioritize social impact and financial return varies depending on the investor. One type of impact investment is a program-related investment (PRI). A PRI prioritizes social impact above financial return, meaningfully blurring the line between grantmaking and investing. For a PRI, the primary purpose is to accomplish one or more of the foundation’s exempt purposes, and the possibility of a financial return is secondary.