Eileen Heisman interacts with a broad cross section of people involved in charitable giving in her role as president and chief executive of National Philanthropic Trust. She also teaches philanthropy and fundraising at the University of Pennsylvania’s School of Social Policy and Practice. But day to day, “my work is very practical and hands-on, and our donors bring us a lot of wisdom,” she said in a telephone conversation with AdvisorOne.
Heisman discussed some best practices of the kind of philanthropy she and her colleagues see, picked up from donors and people they respect about how they approach philanthropy.
Philanthropy is a common way people with sufficient means pass on their values to their children. They can create giving vehicles, and use those to pass on assets to encourage the next generation to give as well. Donor-advised funds (DAFs) and private foundations are the most common giving vehicles, and these can be passed down to future generations. “Passing on charitable giving vehicles can force the next generations to figure out their relationship to their communities in ways that regular inheritances can’t,” Heisman said. A giving vehicle is also tax efficient for purposes of estate and tax planning, she said.
Heisman (left) finds that Americans have become intensely interested in foreign philanthropy, in no small part because of advances in global communications. “CNN is a great litmus test for how much smaller the world is.” She said NPT has witnessed a huge increase in foreign grant making over the past year. “Donors are mobile; even if they’re not there [at the scene of a disaster, for example], they can see it quickly and want to respond.”
Unlike most DAF organizations, NPT makes foreign grants directly, Heisman said. “If donors come to us with an interest in supporting a foreign entity or a foreign cause, instead of going through another entity, we will do the due diligence directly and support the organization.”
This involves a very hands-on approach. NPT has to be able to demonstrate expenditure responsibility: that the foreign entity is spending the money on a purpose similar to, equivalent to a charitable activity in the U.S. because the donor has received a charitable deduction for the donation. A year later, it has to seek proof from the foreign entity that is has used the money for the exact purpose it initially posed. NPT must also clear the organization with the Treasury Department’s Office of Foreign Asset Control.
NPT, like many DAF organizations, also makes foreign grants through domestic U.S. charitable entities called “friends of” organizations. Here donors give to a domestic organization, such as “friends of Oxford University,” which passes it on to the foreign charity.
How to Give
Heisman has several rules of thumb:
- Give with your heart and your head. “It’s great to have an impulse to give to something that’s important to you, but don’t just give impulsively without thinking about the kind of project you’re giving to.”
- Give fewer, larger grants and stay with the organization for a long time; don’t be fickle. “Organizations have a hard time finding predictable income sources, and when they know you’re going to be around for a while, they spend less on overhead raising money.”
- General operating expenses money is hardest for charities to raise. “If you really love the charity and the board and the leadership, you should let them use the money to pay the electric bill and computer upgrades because that’s as important as any program.”
- Don’t be obsessed with overhead. “‘Overhead’ in general is not always a bad word.” Sometimes, an organization is in a startup phase, which is an overhead-intensive period. Sometimes an organization needs more people to deliver its services. And keep in mind that the 990s all charities fill out, from which overhead is calculated, get filled out by people with all kinds of training and background. “So you’re not always comparing apples to apples when you look at the tax filing.”
- There’s nothing better than making a site visit to a charity. “You can see close up what’s getting delivered. This is especially important if you’re going to give a large sum.”
- Invest in good leadership. Good leadership is key just as it is in a for-profit organization. “An organization that’s well run with someone who is a creative, forward thinking leader, who can see the future and can plan for it is what you’re investing in.”
- If you’re going to use metrics, make sure the metric you’re looking at is really one measuring something that’s key. “Don’t shy away from an organization providing a service that’s hard to measure. Just because it’s hard to measure doesn’t mean you shouldn’t want to participate somehow or invest in it somehow.”
Changing Financial Circumstances
Heisman said NPT often sees people create giving vehicles based on one or two big events in their lives, such coming into a big inheritance, selling a family business, receiving a big bonus or participating in an IPO. “Changing financial circumstances can be a great trigger moment for people to give. It’s one of those times you can offset the taxable part of the event, but you can also create a giving vehicle for one, two, three generations.”
Donors who experience financial reverses, on the other hand, can face a very difficult situation. For one thing, many giving vehicles are irrevocable, so the donor cannot take back the money. For another, Heisman said that in the past couple of years, she has seen people not make good on pledges or try to renegotiate them. “I counsel charities that if somebody really doesn’t have the assets and they made a pledge, you have to figure out a way to renegotiate it. Suing your donor is an option, but it’s not a very desirable one. If people don’t have the money, they don’t have the money.”
She said one thing a charity can do is extend the pledge over a longer period of time, or give the donor a hiatus and pick the pledge up later. In some circumstances, the charity can release a donor from a pledge. “You don’t like doing it; you don’t want to do it.”
Donating Unique and Illiquid Assets
NPT is willing to accept unique and illiquid assets from donors, such as restricted stock, closely held stock or REITs, according to Heisman. The donor receives a deduction for the full fair market value of the asset because NPT is a private charity—whereas a similar gift to a private foundation would allow the donor to deduct only the cost basis of the asset, what he or she had paid for it. NPT then goes out to the market and sells that asset, turning it into charitable dollars.
Heisman noted that many charities are reluctant to accept illiquid assets because they consider them too risky or do not know how to sell them or do not want to be responsible for the liabilities when they hold on to them.
She said NPT vets donated assets very carefully before accepting them, as people try to donate all kinds of things: unsellable real estate or an aging manufacturing plant nobody wants to buy and the donor doesn’t want any more. “If it looks like something that’s free and clear and has a market to sell, we will accept it and then turn something that was illiquid into a liquid charitable asset. The donor gets to make grants to charitable organizations, and the assets get passed on to someone who wants it.”
NPT is an independent charity whose mission is to increase charitable giving in American society. The organization provides services that allow donors to establish donor-advised funds. Founded in 1996, NPT has raised more than $2 billion in charitable assets and made upward of 44,000 grants, valued at more than $1 billion, to U.S. and international charities.