Charitable giving options

Can private foundations provide grants to foreign charities?

Yes, they can! There are several ways for private foundations to make grants of an international character. The most straightforward way is to make a grant through a United States based 501(c)(3) public charity that has programs abroad. The American Red Cross, for example, will oftentimes set up dedicated disaster relief funds when a certain country experiences a natural disaster such as an earthquake. The key point is that the legal recipient of the grant is officially recognized by the IRS as a 501(c)(3) even if the charitable dollars are ultimately spent abroad. 

Similarly, some large foreign nonprofits will go through the IRS 501(c)(3) process and set up an affiliate organization in the U.S. that accepts funds on their behalf. These organization are oftentimes referred to as the “US Friends of” arm of the foreign charity. Attaining 501(c)(3) status as a public charity entails a fair amount of paperwork and lawyering so typically only large organizations consider going through this process. Some common types of “US Friends of” organizations include religious institutions, universities, museums, and theatres. For example, the Friends of Notre-Dame de Paris is the official 501(c)(3) charity leading the fund-raising efforts in the United States to rebuild and restore the Notre-Dame Cathedral after the devastating fire in 2019. Private foundations are allowed to make grants to this kind of organization because they have been recognized as 501(c)(3) public charities by the IRS.   

But what if your foundation would like to support an international cause that does not have a 501(c)(3) organization backing it up?  Say for example, a foundation decides it would like to support an orphanage in Haiti that does not have official recognition in the United States. Is grant making possible in such a case? Yes, it is possible. Private foundations can make grants to international charities even when there is no IRS recognized intermediary. The process to do so, however, is more complicated than simply writing a check. 

There are two principal methods that allow private foundations to make grants to charitable organizations not recognized by the IRS. The first method is known as “equivalency determination” and the second method is known as “expenditure responsibility”.

What is equivalency determination for private foundations?

Equivalency determination means that when making a grant to a foreign charity a foundation must make a good-faith determination that the foreign organization is similar and equivalent to a U.S. public charity. An equivalency determination basically demonstrates that the foreign organization would qualify as a 501(c)(3) but for the fact that it is located abroad. This good-faith determination must be made by a qualified tax practitioner as an official piece of written advice. There is a small cottage industry of tax practitioners that provides this service. An equivalency determination is typically valid for two years before it must be refreshed and re-verified. Due to the additional effort required to make grants using equivalency determination, grants of this kind should be of sufficient magnitude to make it worthwhile. 

What is expenditure responsibility for private foundations?

Expenditure responsibility means that when making a grant to a foreign charity a foundation must establish adequate procedures to make sure the grant is spent only for the purpose for which it is made. Furthermore, 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 perform basic due diligence on the foreign charity dealing with matters such as the identity, past history, management, activities, and practices of the recipient organization. The due diligence should be complete enough to give reasonable assurance that the recipient will use the grant for the purposes for which it is made. Further, the foundation must obtain a written commitment from the recipient organization that the funds will only be used for the specific charitable purposes of the grant, adequate books and records will be kept, and the recipient organization will submit full and complete financial reports to the foundation detailing compliance. The foundation must compile and store the reports and provide summaries of the expenditures to the IRS. Due to the additional effort required to make grants using expenditure responsibility, grants of this kind should be of sufficient magnitude to make it worthwhile.

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