Seven major shifts are cited in What’s Next for Philanthropy in the 2020s. These shifts are significant challenges to our collective social, political, environmental, and economic systems, and they are prompting philanthropists to make significant capital investments in search of solutions.
Investments for Social Change
Philanthropic funding in 2020 by individuals, businesses, trusts, and foundations were estimated by Giving USA to be more than $471 billion. This is only measuring philanthropic dollars invested through traditional gifts and grants—places where returns on investment are measured in program service accomplishments. This does not capture the growing field of philanthropic adjacent investments in the environmental, social, and governance (ESG) space. ESG investments run the gambit from philanthropic loans to purpose-structured investment portfolios.
ESG investments are still evaluated on the financial return on the investment—just like traditional financial investments—but they are also evaluated on secondary factors prioritized by the individual investor, the specifics of which are customized to the individual investor and their current ESG priorities. Deloitte Insights estimates that at the current growth rate, ESG-mandated assets are on track to represent half of all professionally managed assets globally by 2024.
At the Global Center for Excellence in Philanthropy, or GCEP, we focus on listening and helping philanthropists effectively deploying assets for a philanthropic purpose. After focus areas are established, we find that donors usually question which assets out of a variety of possibilities should be deployed for charitable purposes. Asset strategy questions often come down to choice of asset, timing, and method of deployment.
To understand the “correct” asset in a specific situation, the purpose of the gift is an important first step. We find that underutilized assets are low-hanging fruit for donors. Other times, there is a community need to which the donor is responding. In either case, an example of the need being fulfilled may be providing a nonprofit with inexpensive (or even free) office space. While there are tax aspects to making these types of gifts, the technical nuances are beyond the scope of this article. However, generally speaking, the gift of the right to use an asset is an “incomplete gift” to charity, and it does not give the donor a charitable tax deduction based on the property’s value.
However, there may be a charitable tax deduction available for out-of-pocket expenses related to allowing a charity to use real or tangible personal property. Moreover, donating the value of the property may not be the donor’s primary goal. If the asset is underutilized or creating an expense for the donor that can be defrayed by deploying the asset for charitable purposes, this can be a mutually beneficial outcome.
Choice of Giving Vehicle
In addition to the questions of what and where to give, at GCEP, we find many donors both individual and corporate are interested in larger-scale gifting, coupled with philanthropic investing. Donors are often motivated by control, privacy, and impact. These additional motivations require further consideration of alternative philanthropic vehicles.
For many donors, the “control” of the donated property continues to be the area that requires serious consideration. This often gets framed up as a binary choice between a private foundation and a donor-advised fund, or DAF. We find that this may be too narrow of a decision paradigm ignoring all the other potential charitable options available to donors. Other options may include medical or agricultural research organizations, privately funded schools, supporting organizations, and split-interest trusts. Understanding the donor’s goals first helps in determining the vehicle with the fewest barriers and most benefits.
For philanthropists concerned over diminishing privacy and perceived restrictions on lobbying and political activities, the focus often shifts on social welfare organizations—501(c)(4), or “(c)(4),” entities—and single-member LLCs formed for a charitable purpose. While these organizations enhance privacy and provide fewer government restrictions on charitable activity relative to other charitable organizations, there are some drawbacks, including the potential for the inclusion of the organization’s assets in an individual donor’s estate if the donor directly or indirectly retains control over the organization. The tax implications of this are outside of this discussion, but interested persons should consult Internal Revenue Code Sections 2036 and 2038.
This estate inclusion is expected with a single-member LLC, but some donors have not been prepared for this outcome with social welfare organizations. Both the social welfare organization and the single-member LLC provide substantial donor privacy, but the single-member LLC provides more privacy because it is not subject to IRS Form 990 reporting and public disclosure, while the 501(c)(4) is subject to IRS reporting. Lastly, although the 501(c)(4)’s Form 990 reports income, expenses, and all of its charitable activities, it has the benefit of only paying tax on unrelated business income (on IRS Form 990-T) and not passive investment income or exempt-purpose income unless it engages in political activities during the tax year. On the other hand, all income of a single-member LLC is taxed to the LLC member(s).
We are seeing individuals, corporations, and foundations increasingly take a more strategic approach to philanthropy. The calculus of return on investment is increasingly complex, including both financial and diverse secondary philanthropic returns. Everything from program service accomplishments as reported on a Form 990 to certified ESG reports are emerging as standards for a secondary return on investment. There is still more to come, and ultimately, donors and investors will decide what is important and meaningful to them and what will lead them to invest in an enterprise.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Jane M. Searing is a managing director in the Global Center for Excellence in Philanthropy at Deloitte Tax LLP. Searing has dedicated more than 30 years to serving tax exempt organizations and their supporters, specializing in private foundations, public charities, and philanthropic tax planning.
Mike Schlect is the Private Wealth Tax practice leader for the Western US at Deloitte Tax LLP. In this role, he leads over 300 colleagues to develop and deliver innovative tax solutions related to the income, gift, and estate tax planning matters for private wealth clients.
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