Question: My accountant just told me we have to distribute $50,000 by the end of the month, and our grant process is still in midstream. These are routine cash grants that don’t qualify under the setaside rules. Is there any way we can make a distribution but somehow select our grantees in an orderly fashion?
Answer: Even a well-run foundation may find itself with undistributed funds on hand as the year-end deadline approaches. Intended grantees may delay returning grant agreements, or details concerning a project to be funded may remain unresolved. A foundation can overcome these difficulties by making a grant to a donor-advised fund.
For tax purposes, such a grant is a qualifying distribution to a public charity. Once made, the donor-advised fund will normally redistribute those funds to the grantee of the foundation’s choosing, but not before the foundation and its managers complete their discussions and other pre-grant steps with the ultimate grantee.
A donor-advised fund may also prove helpful for long-term grant arrangements in which later distributions are to depend upon the grantee’s performance or other contingencies. Should it become necessary to withhold or redirect funds, the time required to reconsider how and when to distribute the funds may take longer than is available to the foundation by an approaching year-end. By running the grant through a donor-advised fund, the foundation can distribute the funds once and for all, thereby meeting its distribution requirement, but retain the flexibility to withhold funds or redirect them if the project as originally conceived is thwarted.
Question: Normally our foundation is pleased to be associated publicly with our grantees, but we are now working on a proposal that may be a problem. Is there any way we can make an anonymous grant?
Answer: Anonymous gifts to charity have a long pedigree. For modern American donors, however, federal tax rules make anonymous giving a real challenge. Charitable organizations are legally required to acknowledge contributions of $250 or more in writing and state whether any goods or services were provided in consideration of the gift. In the case of a sizable property gift, an IRS Form 8283 must be filed with the donor’s income tax return, including the signatures of both the donor and the grantee.
Similarly, when a foundation gives to a private charity, the foundation’s name on the check is enough in most cases to let the grantee know the funds’ origins. In addition, the foundation must include on its tax return complete details of contributions made to the foundation and grants made by it. In virtually every case, anyone can obtain a copy of that return on the Internet.
What’s a donor to do? First, donors who generally wish to avoid the limelight should choose a neutral, non-family name for their foundation, which will help deflect attention from them, albeit imperfectly. Second, as in the previous question, donor-advised funds can be of considerable help. The most reliable means of achieving anonymity for a grant is to use another public charity as an intermediary. Organizations operating donor-advised funds sometimes indicate on their websites that they stand ready to serve such a function.
Let’s review how a donor-advised fund works. These funds may be formed by an existing charity, such as a community foundation, or they may be formed by a large financial institution like Fidelity or Vanguard, or they may be free-standing public charities organized to support specific causes, such as DonorsTrust. The fund creates an account in the donor’s name, and funds are distributed out to charitable grantees on the basis of recommendations from the donor. Technically these distributions are controlled by the fund’s own trustees, but recommendations for a routine distribution to a qualified charity would seldom be refused.
Consider the following scenario. The Friendly Family Foundation wants to provide funding for a specific local project of Save the Forest Organization (STFO) but does not want to become publicly identified with all of the policy positions adopted by STFO. Friendly Family Foundation can make a grant to Local Community Foundation and list this grant as such on its tax return and its other reports. Local Community Foundation then places the funds in a donor-advised fund and, pursuant to a recommendation from the Friendly Foundation, makes a grant from that fund to STFO. The recipient, STFO, is told only that the grant was made from an anonymous fund at the Local Community Foundation.
—Jerry J. McCoy is an independent attorney in Washington, D.C., specializing in charitable tax planning and foundations. The questions and answers presented here are illustrative only and should not be considered legal advice. Please consult with a nonprofit attorney or other qualified advisor for specific answers.