A strategic approach to philanthropy: key compliance considerations

The desire to help humanity and promote the welfare of others is common amongst most individuals. This can be a key driver for many wealthy individuals and families to become philanthropists.

While passions and interests are very important in shaping focused philanthropy, it is equally important to set up and run philanthropic activities just as you would a business venture in order to be focused and impactful. Since most all individuals’ philanthropy is born from an emotional motivator and desire to help, sound business practices are not always top of mind. As a result, compliance can often become an afterthought.

Equally, some philanthropists may know they should focus on compliance, but do not have the time, money, or resources to do so. Others may also feel overwhelmed, as they aren’t sure where to begin. However, much like a successful business, a successful philanthropic venture takes compliance seriously, with careful thought and consideration. Without it, individuals could face significant unintended consequences including reputational damage, loss of income, unpaid taxes, or loss of philanthropic status.

Philanthropists do not need to take on all this work alone. In many instances, individuals engage third-party professionals to help monitor and adhere to the compliance requirements of philanthropic giving. For example, tax experts can ensure the accurate and timely filing of tax returns required of a private foundation. Additionally, individuals could engage with other foundations working in the same field, not only for any co-funding opportunities, but for the ability to share practices, policies, and lessons learned.

We have identified the following five compliance best practices to help philanthropists engage in more focused and impactful philanthropy:

Advisory board

An advisory board is particularly helpful for those that do not use a philanthropic entity. Similar to a board of directors, an advisory board can be comprised of family members or respected individuals that offer additional perspectives and varied areas of expertise.

The role of the advisory board is to provide input and perspectives to help guide families; for example, review of the mission statement, participating in the investment review, or helping to determine additional best practice compliance the family may want to establish.

Mission statement review

The philanthropic purpose and principles that guide a philanthropist’s charitable work should clearly set the course of philanthropic work and avoid ambiguity all in one document. The mission statement should be broad enough to allow for innovative ideas and nimble deployment of philanthropic resources without being ambiguous or trying to solve for all issues impacting a community or underserved population.

The mission statement should be reviewed every three to five years, as this allows for course correction as needed without making frequent changes, which can lead to lack of direction and focus.

Five-year giving projection

A rolling five-year giving projection offers insights into the future granting requirements that philanthropists can begin to plan for today.

Grants can be staggered between years to ensure each year has enough grant expenditures to meet the philanthropic giving goals or statutory requirements. Tax carryforwards can also play a role in this projection and therefore philanthropists should work closely with their tax advisor when preparing this.

Grantee due diligence

At a minimum, a cursory level of due diligence should be performed on the nonprofit. This can be as simple as a check of the nonprofit’s tax-exempt status or an online search to review the latest news, favorable or unfavorable, about the nonprofit. A more robust due diligence process could include a review of the nonprofit’s organizational health. Through site visits, online research, and discussions with the prospective nonprofit, inherent conflicts can be uncovered, an assessment of the skill level and experience of the nonprofit can be made, and credibility of the nonprofit’s board of directors can be ascertained.

Records retention policy

In general, an effective records retention policy will ensure accurate financial statement and tax return preparation. Taxpayers have the burden of proof when it comes to documentation. This holds true for individuals to substantiate charitable donations and for private foundations to substantiate receipts and disbursements or programs/grants that carry out the exempt purpose of the organization. At a minimum records should be retained for any year that is still open for an audit.

While philanthropic activities that are set up and run as a business venture lead to more focused and impactful philanthropy, best practice compliance can tend to be more onerous. There are many other best practices available, however each should be considered in terms of the cost to implement vs the benefit provided. Best practices and policies that are documented, reviewed and updated on a periodic basis tend to be more effective and easier to administer.