In 2023, following passage of the Donor Intent Protection Act in Kansas, Philanthropy Roundtable launched a monthly series on donor intent developments and controversies nationwide to better inform you about this important topic. The Donor Intent Protection Act has now passed in Kentucky, Georgia and Montana, and efforts on behalf of this legislation will continue in additional states in 2025 and 2026.
We encourage donors to contact us with any questions about our featured items and consult additional resources on donor intent at the Roundtable’s Donor Intent Hub. We also welcome any news about donor intent we may have missed.
This month’s Donor Intent Watch opens with the settlement of an Ohio dispute from 2024 regarding the library holdings of Hebrew Union College. This is followed by the sixth in a series on the importance of choosing the right vehicle(s) for your giving. In this installment, we share the pros and cons of using philanthropic LLCs. We close with a brief note to last month’s discussion of community foundations.
Ohio’s AG Protects Donor Intent at Hebrew Union College
In July 2024, the Donor Intent Watch featured a story describing the efforts of David Yost, Ohio’s attorney general, to prevent Hebrew Union College from selling items in the rare book and manuscript collection housed in the Klau Library on its Cincinnati campus. The college, facing financial concerns stemming from declining enrollment, had been assessing its collections to determine their value. College President Andrew Rehfeld claimed it was a routine assessment and there was no intent to sell any items.
Yost’s filing, however, claimed college officials had contacted Sotheby’s auction house and suggested sales from that collection might violate the intent of donors who made gifts to purchase and preserve items in the collection to ensure they would be available to future scholars. A preliminary injunction preventing any sales was issued at that time.
We can now report a settlement has been reached between Hebrew Union College, the oldest Jewish seminary in the United States, and the attorney general’s office. The settlement mandates greater transparency regarding the collection, requiring the college to provide the attorney general’s office with a complete inventory of the items in the library’s Special Collections and Rare Book and Manuscript Collection, including any donor restrictions placed on those items.
The settlement also places new restrictions on the sale or removal of books and manuscripts from the Klau Library, requiring at least 45 days notification to the attorney general’s office before attempting to sell or remove items from the collection. Finally, the settlement provides proceeds from any approved sales be used only “to acquire new collection items unless the college’s board declares an acute financial need with a two-thirds majority vote.” The college still faces declining enrollment, but has chosen to address its financial issues by phasing out and cutting programs.
The actions of attorney general David Yost in this case reflected the importance of the Klau Library and its holdings to biblical and Jewish scholarship. Established in 1875 alongside Hebrew Union College, its collection has grown from 130 donated items to over 600,00 today and includes printed books and pamphlets from before 1500 to current acquisitions.
“These sacred texts,” Yost noted, “were entrusted to Hebrew Union with the promise that they would be preserved for the benefit of scholars and researchers worldwide. I commend the college’s leaders for renewing that pledge with this agreement.”
Read more here.
Protecting Donor Intent with Philanthropic LLCs
If you seek maximum flexibility in your philanthropy, you might consider bypassing the tax-exempt route and forming a for-profit limited-liability company (LLC). The benefits of LLCs in charitable work are numerous: wider latitude and diversity of spending opportunities, less regulation and red tape and augmented privacy and control.
Facebook founder Mark Zuckerberg and his wife Priscilla Chan chose this vehicle in 2015. Declaring their intention to donate 99% of their Facebook shares to charitable causes in their lifetimes (an estimated $45 billion pledge when it was made), they formed an LLC (the Chan Zuckerberg Initiative). The LLC accompanies the existing Chan Zuckerberg Foundation (a private non-operating foundation) and the sizeable donor-advised fund the couple funded at the Silicon Valley Community Foundation.
Philanthropic LLCs are popular with other Silicon Valley power brokers as well, including Pierre Omidyar, Steven Ballmer and Laurene Powell Jobs, widow of Apple founder Steve Jobs. In early 2019, John and Laura Arnold announced the restructuring of their philanthropy as Arnold Ventures, an LLC which overarches the Laura and John Arnold Foundation (a private foundation), the Arnolds’ donor-advised fund and their 501(c)(4) Action Now Initiative.
At that time, President Kelli Rhee explained an LLC structure would be beneficial for the Arnolds’ philanthropic work on topics like criminal justice, health care and school performance. Although grants to (c)(3) nonprofit organizations would continue to come from the private foundation and donor-advised fund, “We realized that in order to create change that lasts, we would need to remove barriers between data and decisive action, working swiftly across the policy-change spectrum,” said Rhee.
Charitable LLCs are not tax-avoidance vehicles. In fact, the most obvious downsides to LLCs are the loss of a tax deduction for any funds donated to the entity and the fact that income generated by LLCs will not be tax exempt. Donors may still take a charitable deduction on their personal tax filings for all funds donated through their LLCs to what the IRS defines as charitable causes.
The advantages of philanthropic LLCs over private foundations are significant in providing wider diversity of spending opportunities, less red tape, augmented control and privacy.
- They are not subject to annual distribution requirements.
- They give donors the latitude to invest in domestic and foreign for-profit ventures. For example, Powell Jobs’ Emerson Collective bought a majority stake in The Atlantic magazine in 2017. The Omidyar Network has invested in Flutterwave, an African payment processing company, to support Africa’s economic growth through global commerce.
- When program staff are employed by an LLC (rather than by a (c)(3) entity), they can move seamlessly from (c)(3) to (c)(4) for for-profit work.
- At the federal level, LLC’s electing to be treated as partnerships or sole proprietorships may donate to candidates or political action committees. But the contributions will be attributed to the owners of the LLC and count against the owners’ individual contribution limits.
- At the state level, 27 states currently permit LLC contributions to state and local candidates in some form. Even in those 27 states, however, regulatory policies governing these contributions vary. Some states permit LLC contributions to political action committees but prohibit them to candidate committees. Some have an unlimited contribution limit to candidates whereas others have a low limit. For all donations of a political nature, both federal and state, we recommend donors utilizing LLCs consult an attorney knowledgeable in nonprofit law.
- Donors can use LLCs to support foreign charities without the requirement imposed on private foundations to determine that prospective foreign grantees are the equivalents of Section 501(c)(3) public charities. Without such determination or the use of a (c)(3) intermediary, however, the gift will not qualify for a charitable deduction.
- In contrast to a private foundation’s tax return, LLC filings can remain private.
- LLCs permit donors to dedicate valuable chunks of their enterprises to philanthropic purposes without endangering the ownership of their businesses. Zuckerberg, for example, would have been gradually forced to relinquish control of Facebook if he and Chan had donated stock to their foundation rather than an LLC, because of federal tax law forbidding excess business holdings.
- Through an LLC, donors may make concentrated investments without running afoul of federal or state rules.
- LLCs are not subject to the “self-dealing” rules applied to private foundations, so donors can structure their operations and compensation plans in ways that integrate their philanthropy with their business. Donors who use both LLCs and nonprofit philanthropic vehicles do need to be alert to those rules, however.
Because LLCs are designed and governed by their donors, they can typically avoid the common threats to donor intent. Their managers are employees, not the independent directors of a foundation. And LLCs can be terminated, and their assets transferred, any time their donors wish. They are ideal vehicles for donors committed to spending down their financial resources in their lifetimes.
LLCs cannot pass to subsequent generations without incurring estate taxes, however. And donors who choose to transfer assets from an LLC to a tax-exempt vehicle (such as a private foundation) should consider making that when they can still take an active role in the governance and grantmaking of the new entity, so recommended policies and procedures to protect donor intent can be put in place.
Note on Community Foundations
In September’s Donor Intent Watch, we advised donors using community foundations as their charitable vehicles to exercise caution regarding donor intent. Several community foundation leaders expressed concern about our language, fearing it might drive donors away. While our comments may seem harsh, we certainly acknowledge the amazing work performed by community foundations in our 50 states and beyond.
Our advice on donor intent is presented from a worst-case and legal perspective. When donors give to community foundations, they make irrevocable gifts and no longer own those funds. We remind DAF donors of that regularly, but it applies to all community foundation funds.
It’s simply wise for donors to ask the right questions about the extent to which they can enforce any gift agreements because – in that worst case scenario – they do not have legal standing. We know community foundations typically provide excellent stewardship for moral and practical reasons, but there will always be some bad actors.
