In the ever-changing landscape of philanthropy, the traditional limitations of grantmaking are becoming increasingly apparent. As societal challenges become more complex, the need for innovative and impactful strategies in philanthropy has never been more urgent. This article examines innovative alternatives that are reshaping the way philanthropic goals are achieved.

The New Paradigm of Philanthropy

Gone are the days when philanthropy was only about simple grant making. Today, foundations and philanthropists are looking for dynamic approaches to create sustainable and long-term impact. These innovative strategies go beyond simple financial support, interweaving with the core missions of philanthropic entities to effectively address social, environmental and economic challenges.

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Mission-related investments

Public charities and private operating foundations have long used mission-related investments. However, there has been a transformative shift in philanthropic funding from non-performing private donors and foundations. Unlike traditional investments, IRAs link a foundation's investment portfolio to its charitable goals. This approach not only generates financial returns, but also advances social goals. Successful examples of MRIs prove their ability to drive positive change while maintaining financial sustainability.

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Recoverable grants

Repayable grants provide another innovative tool. These grants are structured as loans to be repaid according to agreed terms, enabling the recycling of funds into new projects. This model increases the efficiency of philanthropic funding and promotes accountability and sustainability in funded initiatives.

New structures for giving

Exploring alternative legal structures such as family LLCs, 4947(a)(1) (non-exempt) Charitable Trusts and 501(c)(4) social welfare organizations opens up new opportunities for philanthropy. These structures offer greater flexibility, operational advantages and tax benefits, broadening the scope of philanthropic efforts and enabling more strategic and effective allocation of resources.

Philanthropists often face practical questions when it comes to innovative philanthropy. This includes understanding the intricacies of program-related investments, navigating political activities in 501(c)(4) organizations, and understanding the tax implications of various philanthropic structures. Clear and concise answers to these questions are essential to making informed decisions.

Here are the top three questions clients ask about alternatives to grantmaking:

1. What primary goals should program-related investments achieve within social welfare activities?

IPRs within social welfare activities must primarily carry out one or more of the purposes specified in section 170(c)(2)(B) of the Internal Revenue Code. These goals include advancing science, combating environmental degradation, promoting the arts, providing assistance to poor individuals, and preventing urban decline, among others. PRIs must serve primarily exempt purposes and not be primarily motivated by income generation or property appreciation.

2. How can a 501(c)(4) organization engage in political activities and lobbying while maintaining its status as a social welfare organization?

While advocacy for the common good and general welfare of the community remains the primary purpose of a 501(c)(4), such organizations may participate in political campaigns and lobbying efforts. However, ensuring that these activities do not overshadow their social welfare goals is essential. To maintain the status of a social welfare organization, a 501(c)(4) must adhere to the following guidelines:

• Avoid political activities being the main focus of the organization. Although the IRS traditionally used a “less than 50%” standard to establish primary activity, this threshold is not definitive and is subject to review.
• Obtain an IRS determination letter to confirm the organization's status as a 501(c)(4), ensuring that all requirements are met.
• Engage in genuine social welfare activities that help the community and align with the organization's mission statement. This may include the awarding of grants or active programs.
• Avoid engaging in significant private purposes that would disqualify the organization under section 501(c)(4).
• Be wary of excessive political and other non-social welfare activities, as these may affect the organization's tax-exempt status.

3. What are the tax implications and operational considerations when using non-501(c)(3) structures for philanthropy? When using non-501(c)(3) structures for philanthropy, such as 501(c)(4) organizations or family limited liability companies, there are several tax implications and operational considerations to keep in mind:

• Tax treatment: In the case of family LLCs, the tax on net income from investments and other income is passed on to the member. Contributions made to LLCs do not qualify for a charitable deduction for the donor, but grants made by LLCs to charities may qualify for a charitable deduction. Although there is no gift tax to the donor, the transfer of the LLC's assets to a charity is necessary to avoid the inclusion of estate tax upon death.
• Operational limitations: LLCs are not subject to the self-dealing restrictions that apply to private foundations, providing more flexibility regarding employees, space, and shared resources between the LLC, donors, and other non-foundation entities. privately controlled by the donor. This provides greater operational freedom compared to a private foundation.
• State tax matters: While LLCs are generally disregarded for federal tax purposes, there may be state-level tax considerations to consider. Understanding the state tax landscape is essential to ensure the smooth operation of the LLC.
• Avoiding private foundation rules: By using a 501(c)(4) or an LLC, donors are exempt from the “private foundation” rules outlined in Chapter 42 of the Internal Revenue Code. This can be useful for those who wish to avoid the restrictions and excises imposed on private foundations.
• Gift and estate tax considerations: Transfers to 501(c)(4) organizations are exempt from gift tax under IRC § 2501(a)(6). However, donors should plan for the possibility of including estate tax under IRC § 2036 if the assets are still in their estate after death.
• Use of a Non-Exempt Charitable Trust (NECT): By giving up certain tax deductions, it is possible to create a wholly Charitable Trust that is not subject to private foundation rules. However, such a trust would be fully taxable and must file a Form 1041 each year. It can serve as a philanthropic vehicle or hold some challenging assets.
• 4947(a)(1) Trusts: These trusts are treated as private special purpose foundations after a charitable deduction is taken in respect of the Trust.

The landscape of philanthropy is undergoing a remarkable transformation. As traditional grantmaking gives way to more innovative and impactful strategies, the potential for creating lasting change becomes enormous. These emerging approaches increase the effectiveness of philanthropic efforts and inspire a new generation of philanthropists to think creatively in addressing the world's most pressing problems.