Charitable giving options

Can private foundations provide grants to foreign charities?

Yes they can! Private foundations have several avenues for making grants with an international focus. One straightforward method is to collaborate with United States-based 501(c)(3) public charities that carry out programs abroad. For example, renowned organizations like the American Red Cross often establish dedicated disaster relief funds when specific countries experience natural disasters such as earthquakes. While the funds are ultimately spent abroad, the key aspect is that the legal recipient of the grant is officially recognized as a 501(c)(3) public charity by the IRS.

Similarly, some large foreign nonprofits choose to undergo the IRS 501(c)(3) process and establish an affiliate organization in the U.S., commonly known as the "US Friends of" arm of the foreign charity. This status requires considerable paperwork and legal work, making it a more feasible option for larger organizations. "US Friends of" organizations can encompass a wide range of entities, including religious institutions, universities, museums, and theatres. For instance, the Friends of Notre-Dame de Paris is the official 501(c)(3) charity leading fundraising efforts in the United States to rebuild and restore the Notre-Dame Cathedral after the devastating fire in 2019. Private foundations are permitted to make grants to these "US Friends of" organizations due to their recognition as 501(c)(3) public charities by the IRS.

But what if a foundation desires to support an international cause lacking a 501(c)(3) organization in the United States? For instance, consider a foundation that would like to assist an orphanage in Haiti that lacks official recognition in the United States. Is grant-making feasible in such a scenario? Indeed, it is possible. Private foundations can make grants to international charities even without an IRS-recognized intermediary. However, the process is more intricate than simply writing a check.

Two principal methods enable private foundations to provide grants to charitable organizations not recognized by the IRS: equivalency determination and expenditure responsibility.

What is equivalency determination for private foundations?

Equivalency determination involves the foundation making a good-faith determination that the foreign organization is similar and equivalent to a U.S. public charity. Essentially, it demonstrates that the foreign organization would qualify as a 501(c)(3) if it was located in the U.S. This determination must be made by a qualified tax practitioner as an official piece of written advice, typically valid for two years before requiring refreshing and re-verification. While this method entails additional effort, it remains a viable option for grants of sufficient magnitude.

And what is expenditure responsibility for private foundations?

Expenditure responsibility requires the foundation to establish adequate procedures to ensure that the grant is used solely for its intended purpose. The foundation must obtain full and complete reports from the foreign charity on how the funds are spent. Before making the grant, the foundation must conduct basic due diligence on the foreign charity, assessing factors such as identity, past history, management, activities, and practices. This due diligence should provide reasonable assurance that the recipient will use the grant as intended. Additionally, the foundation must obtain a written commitment from the recipient organization that the funds will be used for the specific charitable purposes of the grant, maintain adequate books and records, and submit full and complete financial reports detailing compliance. The foundation must compile and store these reports and provide expenditure summaries to the IRS. While this method also involves extra effort, it remains viable for grants of sufficient size.

By exploring these various approaches, private foundations can engage in impactful grant-making that extends beyond national borders, contributing to positive change and empowering charitable organizations worldwide.

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