Multiple Vehicles for Individual Philanthropy
Anyone can dream … but I’m not convinced this is necessarily a dream scenario. Aspiring to be a billionaire appears to come with difficult concessions, serious risks, and major changes to relationships and activities. But at first blush, it sounds cool to be able to give or spend money to advance important causes. Here are some options:
The first option some billionaire philanthropists consider to accomplish their charitable goals is starting a private foundation. A private foundation is a type of 501(c)(3) organization subject to additional rules as compared to a public charity in part because it does not depend on broad public support from donors. But it does allow for a donor to take a deduction for a charitable contribution to the private foundation, subject to certain limitations.
Most private foundations are required to meet a minimum distribution requirement (generally, 5% of its investment assets), and many are designed to grant out the minimum amount required with the plan to keep the private foundation operating in perpetuity (or as long as possible). But there appears to be a growing trend towards private foundations that plan to spend down all of their assets within a more limited time frame, which would allow for greater impact and ability to address urgent causes that would be much more expensive or impossible to address later (e.g., climate change). See, for example, More Foundations Are Speeding Up Giving Due to Global Challenges (Chronicle of Philanthropy, 7/21/22).
One reason I might consider a private foundation for part of my giving is to allow for interested family members to serve on the board as volunteers. I would hope that the governance and grantmaking decisions might provide a reason to keep these family members focused on charitable causes and give them an opportunity to meet and work together.
If I started a private foundation, I would expect it to do more than grantmaking. I would also set it up to make program-related investments (PRIs), which might include loans to nonprofits and loans and equity investments in for-profit social enterprises. Additionally, I would create requirements to ensure that the private foundation’s investments were all mission-consistent since the law does not include such requirement. Finally, I would try to set up the foundation to leverage its funds and influence to be an active but humble and respectful participant in, and supporter of, convenings and collective action with an emphasis on equity, justice, and access.
Donor Advised Fund
A popular alternative to a private foundation is the donor advised fund or DAF. A DAF is not an independent legal entity; it’s a restricted fund housed within a public charity and subject, ultimately, to the control of the charity board. Nevertheless, so long as the donor or any donor advisors appointed by the donor provide advice on grants to be made from the DAF to other public charities in good standing, those grants will generally be made.
Many donors find DAFs particularly attractive because a contribution of noncash assets like stock may allow for donors to avoid capital gains taxes on the disposition of those assets. And while the donor may give up legal control over their contributions, the donor generally retains control for practical purposes so long as they advise on grants to legitimate charities. But DAFs are subject to rules, some of which are similar to those applicable to private foundations, including a prohibition against grants to individuals. And DAFs are likely to face future requirements and regulations.
I would use a DAF as part of my giving strategies. It would avoid any need to create a new organization, form a board, adopt governing documents, apply for 501(c)(3) status, register with the appropriate state agencies, establish proper grantmaking protocols, properly vet potential grantees, review grant reports, and take care of the numerous obligations of operating a compliant charitable organization. And by using a community foundation DAF sponsoring organization, I could benefit from its staff’s expertise in recommending impactful grantees based on my preferred criteria. I might also benefit from anonymity in giving to some charities through a DAF where such charities (and the public) would know only the community foundation as the donor/grantor.
Mackenzie Scott has risen to fame over the past 3 years, not only for giving away over $12 billion during this period, but also for making these gifts unrestricted with few if any reporting requirements. Her giving has primarily been through DAFs and has been guided with the assistance of various philanthropic consultants and firms, including Bridgespan Group.
With this level of giving over a short period of time, the use of advisors with expertise makes complete sense. Of course, this depends on selecting the right advisors based on the donor’s areas of philanthropic interest and values. It would be simple to make large gifts to the best known charities, and that’s too often the strategy of major philanthropists. But this trend appears to be shifting somewhat to first discovering the charities making the most impact in ways attractive to the donor. With nearly 2 million charities (including churches), finding these charities can take some work, and that’s where the advisors and consultants come in.
I would certainly seek some well-established professional advisors, particularly those who bring an equity lens to the causes I would like to fund. I would also seek advisors from more varied backgrounds and experiences, and empower them to lead much of the decision-making.
Donors are increasingly furthering their charitable goals through for-profit entities. Some foundations have long been making grants and PRIs to for-profits exclusively for charitable purposes. A common example is a grant to a pharmaceutical company to develop a drug for public benefit that might otherwise not be commercially viable. Another example is a grant to a micro-business in an area impacted by economic distress.
Entrepreneurial donors may combine their charitable giving with the creation of a for-profit social enterprise whose primary purpose is the furtherance of social/charitable goals. Because private foundations and public charities are limited by the restrictions imposed by Section 501(c)(3) of the Internal Revenue Code, including those related to prohibited private benefits, more than substantial lobbying, and political campaign intervention, socially-motivated entrepreneurs may create for-profit entities to provide additional flexibility. This might allow for higher compensation to experts required to develop new technologies, equity investors, profit-sharing, and unrestricted lobbying and endorsements of politicians that would advance the founder’s social/charitable goals.
I would be interested in the creation of a for-profit social enterprise and possibly having it independently designated as a Certified B Corporation or structured as a benefit corporation or social purpose corporation to provide more confidence and clarity about its primary social/charitable purpose. I might use this entity to invest in companies that are developing technologies, processes, and/or markets to address climate change, racial equity, accessibility, mental illness, and poverty.
Charitable giving directly to individuals, particularly through fundraising platforms like GoFundMe, is another consideration. Lucy Bernholz’s book How We Give Now makes the powerful point that philanthropy is much more than giving money to charities. And giving directly to individuals in need has always been a way donors have furthered their charitable inclinations.
Often this type of giving follows a disaster, but, on a smaller scale, it might be elicited by persons in need within their own communities and networks. Such appeals certainly can tug at the heartstrings and are often shared among friends. In addition, donors may like the idea of directly benefiting a specific person without going through some intermediary institution which would appropriately use part of the donation for associated operational and administrative costs. But a downside to giving to individuals based solely on the information on a fundraising platform is the high prevalence of fraudulent solicitations. While fundraising platforms may have what they identify as strictly enforced policies against intentionally deceiving prospective donors, they generally rely upon reports of fraud after-the-fact rather than up-front due diligence.
The case of fundraising for an individual’s medical expenses raises another downside of this form of giving. It provides cover for social policies and law that do not sufficiently address the healthcare needs of the community and the nation.
I would tend to shy away from donating to persons I don’t know who post appeals on fundraising platforms and focus more on giving to charities that serve persons with similar needs because of the higher assurance that the charities would first vet their beneficiaries and on charities and political leaders focus on improved policies. However, I’m sure there would be exceptions to this rule where I had first-hand knowledge or assurances of the circumstances and needs of the intended beneficiary.
While giving to a 501(c)(4) social welfare organization like the ACLU, Sierra Club, or Planned Parenthood might not provide the benefit of a charitable contribution deduction, a donor’s gift to a 501(c)(4) organization may have greater social impact since the 501(c)(4) organization can do everything a 501(c)(3) organization can do but without the limitations on lobbying and the ability to support or oppose a political candidate. Giving to a 501(c)(4) organization can also be done with greater anonymity because of changes to the disclosure rules just a few years ago.
I’ve been predicting the rise of giving to 501(c)(4) organizations since 2018 when the laws changed reducing the percentage of donors who could take advantage of the charitable contribution deduction to 10-15 percent. I would absolutely include 501(c)(4) organizations as recipients of my giving. In many cases, a 501(c)(4) organization would be better positioned to leverage my contributions to effect important social changes than a charity because of its greater flexibility in funding permissible advocacy activities.
[9/4/22 Update: Here’s a very high profile use of a 501(c)(4) organization that made headlines a few weeks after we published this post: An Unusual $1.6 Billion Donation Bolsters Conservatives.]
[9/14/22 Update: Here’s an even more high profile use of a 501(c)(4) organization during the donor’s lifetime: Billionaire No More: Patagonia Founder Gives Away the Company.]
For the past several years, several very well-known and very wealthy philanthropists, including Pierre and Pam Omidyar, Mark Zuckerberg and Priscilla Chan, and Laureen Powell Jobs, have been using limited liability companies (LLCs) as part of their giving strategy. The LLC is often a disregarded entity for tax purposes and allows for donors to manage their socially-purposed funds apart from their personal funds with the limited liability protection of the LLC. But for federal tax purposes, including for purposes of receiving a charitable contribution deduction, the LLC is treated as not different from its member(s)/owner(s).
This means a transfer of funds from the donor to their philanthropic LLC is typically not a charitable gift and the funds could be returned to the donor without penalty. An intended gift to a charity would be complete (and a deductible charitable contribution would be made) only when the LLC makes the grant to the charity.
Among the benefits provided by the LLC are the ability to: make grants to charities, private foundations, or for-profits; fund advocacy activities; support political candidates or parties; implement competitive compensation strategies; and enter into collaborations with various parties, all without the restrictions imposed on a tax-exempt organization. See, for example, Chan Zuckerberg Initiative – Taxable Social Enterprise – Part 2.
A philanthropic social venture formed as an LLC would certainly be included in my social purpose strategies. The LLC’s flexibility as a legal form would allow me to create governance structures more focused on distributed leadership and decision-making while fairly compensating key contributors. I might not announce transfers to the LLCs as if they are charitable gifts, because they are not, but I would seek to build and leverage goodwill associated with the LLC to further its goals and strategies.
Like many people, I have a number of thoughts about developing a stronger and healthier community. But I also recognize the importance of being humble even in areas in which I believe I have some expertise. Charities that know their communities’ needs can be valuable allies. And certain individuals can also be critically important if empowered.
Creating a number of different charitable giving strategies and vehicles and sharing some of the decision-making authority might make the giving more complicated and might require a donor to devote much of their time to this endeavor. But I have a strong hunch it would also result in much greater and rewarding impact and would also add another example for how billionaire philanthropy can work far beyond the making of a public pledge.