Gino Sera
Partner, BCLP Law

17 August 2023

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What should advisors consider when structuring US-based and cross-border philanthropy?


Trust companies and lawyers are often tasked with creating structures to facilitate and achieve the philanthropic goals of their U.S. taxpayer clients, whether individual or corporate. Desired features of these structures include not only maximizing tax benefits but also flexibility and control and, increasingly, the ability to fund projects both in the U.S. and abroad. A number of structuring options are available to achieve the clients’ overall goals, including in light of more onerous rules and restrictions on cross-border philanthropy. 


Structuring U.S.-based philanthropy 


A philanthropic structure, including one that anticipates cross-border giving, will have a U.S. charity as its anchor. With a U.S. charity, the U.S. taxpayer will be able to make tax-deductible donations and can also leverage U.S. private and governmental grants, which are often limited to U.S. charities, and donations from other U.S. taxpayers. In addition, potential institutional grantees may also prefer that grants be received from a U.S. charity for diligence or other policy reasons. 


Unless the U.S. charity will receive public support or is classified as a per se public charity (e.g., a school, hospital, medical research organization or church), the charity will be classified as a private foundation as opposed to a public charity. A private foundation will continue to offer deductibility for donations (albeit with lower tax-deductible giving limits) and permits governance and operational control by the U.S. taxpayer, but it also comes with increased restrictions and requirements in areas such as self-dealing, minimum distributions, excess business holdings, jeopardizing investments and taxable expenditures (which prohibit lobbying and political activity and expenditure responsibility for grants to foreign organizations, as discussed below). 


Alternatively, the U.S. taxpayer can establish a donor advised fund (DAF), which is a charitable account created and maintained by a public charity, often a community foundation or a charity affiliated with a financial services firm. The U.S. taxpayer will be able to take advantage of an increased tax-deduction threshold and avoid the increased costs and time-commitments associated with establishing a private foundation. However, the U.S. taxpayer cannot control the use of the donated funds, including how the funds are invested or disbursed. Instead, the sponsoring charity will accept non-binding recommendations which it will generally follow, assuming they satisfy its requirements.   


Structuring cross-border philanthropy 


Donations by U.S. taxpayers directly to foreign charities are not tax-deductible as charitable contributions. Therefore, to the extent the U.S. taxpayer desires to support causes outside of the U.S. and desires to receive the benefit of tax-deductibility as a charitable contribution, the following structures are available or potentially available: 


Grantmaking by the U.S. charity to foreign charities 


The U.S. taxpayer’s private foundation or DAF can make grants directly to foreign organizations, but in order to do so the foundation or the DAF’s sponsoring charity must exercise “expenditure responsibility” with respect to the grant (i.e., ensuring that the grant is use solely for the purpose for which it was made, including through required reporting by the grantee and to the IRS) or making a determination that the foreign organization is equivalent to a U.S. public charity. In both cases, the process can be complex and costly but fortunately there are service providers that assist with performing expenditure responsibility and larger, more established foreign organizations often have already been subject to a equivalency determination. 


Grantmaking by the U.S. charity to “friends of” U.S. charities 


Certain U.S. charities have been established to support designated foreign charities or specific causes in other parts of the world, referred to as “friends of” organizations. These U.S. charities typically satisfy the public support test, and are thus classified as public charities. Unlike private foundations and DAFs, they are not subject to the expenditure responsibility rules. However, these U.S. charities may not accept funds earmarked for a specific charity and must exercise control and discretion over the use of the funds (in other words, much like a DAF, “friends of” charities typically will only accept non-binding recommendations on the use of the donated funds, in this case to avoid the IRS characterizing the charity as being a mere conduit for grants to the foreign organizations). 


Grantmaking by the U.S. charity to a foreign subsidiary charitable organization classified as a disregarded entity  


Depending on the country, the U.S. taxpayer’s private foundation may be able to form a foreign subsidiary organization and make contributions to it in order to support causes in that country, without triggering the expenditure responsibility or equivalency requirements. In addition, the subsidiary could also be structured to receive donations that are tax-deductible to donors in both the U.S. and the foreign country. To accomplish this, the foreign subsidiary must be eligible to qualify as a disregarded entity for U.S. tax purposes, which may require filing an election with the IRS to be “disregarded” for U.S. tax purposes (and thus be treated as a branch or division of the private foundation rather than as a separate legal entity) and may require an application for charitable status under the laws of the foreign country.