OCTOBER 04, 2020
Supporting organizations (SOs) are, at first glance, attractive tools for donors who value simplicity, and seek an ongoing, perhaps multi-generational, relationship with the charity to be supported. Broadly defined, an SO is a distinct legal entity that has a supporting relationship to a public charity—frequently a community foundation or university. Examples include the Skoll Foundation, which invests in social entrepreneurs through the Silicon Valley Community Foundation, and the FSU Foundation Supporting Organization, which supports Fitchburg State University and the Fitchburg State University Foundation.
Unlike private foundations, supporting organizations qualify as public charities even though they might have only one donor or family of donors. They are among the few entities recognized as public charities that do not have to meet the test of receiving at least one-third support from the general public. And unlike private foundations, they are not subject to a minimum annual distribution requirement.
Benefits of supporting organizations
In terms of benefits to donors, supporting organizations:
- Save you from the paperwork, administrative, and reporting responsibilities and costs associated with a private foundation.
- Generate the public-charity tax advantages for contributions that are far more favorable than those of a private foundation.
- Free you from the management of day-to-day operations, since these are typically handled by the supported charity.
- Allow you to involve generations of family members, who may act as advisers to the supporting organization.
Risks to donor intent
On the downside, the price of these benefits is high. By law, a donor cannot control a supporting organization. And your gifts are irrevocable. Moreover, to qualify as a supporting organization, the entity must meet one of three legal tests that ensure that the supported charity is guaranteed majority control or—at the very least—strong influence over your grantmaking, and that the SO is responsive to the needs of the charity.
In Type 1 and Type 2 supporting organizations, IRS rules require that the majority of board members be appointed by the supported organization. In Type 3 supporting organizations, the supported organization must be “adequately represented” on its board and have “a significant voice in how the supporting organization manages and uses its assets.”
Typically, a supporting organization will be respectful of your intentions during your lifetime, while you are likely to make additional gifts. But once you are no longer providing funding, supported organizations lose incentives to honor your intent. To reduce this risk, you can request that the supported organization’s representatives on the board of the supporting organization include individuals you know and trust.
You may also include an exit clause in your agreement specifying that funds will go to an alternative organization if the supporting organization is unable to carry out your instructions. Neither of these measures is foolproof, of course, and your giving priorities may well be disregarded over time. The Robertson Foundation’s long dispute with Princeton University in the early 2000s makes clear the potential danger using supporting organizations in your philanthropy may pose to your donor intent.