The firm’s recent e-newsletter had an article about ways to give to a nonprofit that highlighted the different types of charitable contributions that a donor can make (monetary, non-cash, volunteer time, etc.). In addition to the type of donation that is made, the purpose of the funds is another attribute that is important when giving to a charity.
The majority of gifts to a nonprofit entity are unrestricted, meaning that the charity can use the funds in any manner they choose. Often these funds go toward operations, especially for organizations that do not charge for services or sell a product but instead rely on donations to fund their mission.
Oftentimes, however, more wealthy donors will want to give to a specific purpose so that their gift has longer-lasting effects. An example of this is a major building project that incorporates a capital campaign. Other donors want their money working for the charity for a long time and they consider endowments.
Colleges are the most common nonprofits with endowments. When a donor makes a gift to an endowment, the earnings from the gift are used and the principal remains untouched. Endowments only make a significant effect on the funds of a charity if they are significant. For instance, Harvard University’s endowment is famously $37.6 billion at the end June 2015, the largest endowment of any college or university in the world. With an endowment that large, even a 1% return gives $376 million toward operations.
Most everyday charities, of course, do not have endowments nearly that large, and donors who want to make an impact on their local nonprofit of choice should consider whether restricting the principal amount of their gift is in the best interest of the charity. For instance, a $25,000 gift would be considered very substantial to many area charities; however, if that $25,000 is used to start an endowment, the charity may only be able to use $1,000, depending on how well the funds are invested. Theoretically, that $1,000 would extend in perpetuity, and each year the charity would get $1,000 of earnings, whereas an unrestricted $25,000 gift would be used immediately.
The best thing for a donor to do, then, is ask the charity what their needs are. If they have immediate needs, an unrestricted gift is probably best. If they have an endowment fund or are looking to start one, then contributing to that fund may be worthwhile.
Many community funds, including the Lancaster County Community Foundation, set up endowments with local charities as the beneficiary if the nonprofit does not want to handle the administration themselves. Again, the charity only receives a portion of the original gift every year, but that’s another option for donors.
Lastly, some donors will consider a charitable gift annuity, whereby the donor gives a sum of money to the charity but, like an annuity, get paid back a portion over the remainder of their life. So, the initial funds can benefit the charity immediately, but the nonprofit has to pay the donor back for a number of years, which depending on the age of the donor at the time the annuity is established, could be a significant period of time. Also, in Pennsylvania, there is a requirement for how much unrestricted cash the charity must have on hand compared to the amount of the charitable gift annuities. Some organizations do accept charitable gift annuities, and the indefinite nature of them makes them unappealing to many charities. A donor ought to ask a charity if they accept them before setting one up.
Overall, the best way that a donor can make a large donation to a charity and have it do the most good is simply to ask the charity where they could use the funds the most. Their answer should play a significant role in determining the stipulations with which the donor makes his or her contribution
Dan Massey, CPA, Manager