The US Department of State paused foreign aid in accordance with recent Executive Orders by the President. While Secretary of State, Marco Rubio, may finally determine that some of the grants and aid are aligned with the President’s Order and allow them to proceed, the need for aid is vital and critical in many areas globally. The changing landscape of America’s position on foreign aid illustrates a critical gap in charitable giving. Charitable planning often focuses on using tax-efficient vehicles, such as a private foundations, charitable remainder and annuity trusts, or donor advised funds, to fund existing, often well-established non-profits. International philanthropy, especially for immigrant and multinational entrepreneurs, can involve implementing multi-tiered planning and implementation strategies, sometimes involving supporting grassroots organizations that may not independently qualify under charitable organization requirements in the Internal Revenue Code.
Different Structures in Philanthropy
The charitable trusts may be used in conjunction or separately from private foundations. Private foundations may be preferred by those creating a multigenerational legacy of giving or seeking to be directly involved in charitable efforts. Some of the primary ways to fund grassroots efforts are to fund an international project through a domestic private foundation, liaison with a local international non-profit to further a project or mission and create an international foundation or charitable organization abroad that directly funds or furthers the mission of the nonprofit. Multinational entrepreneurs may also directly give money to foreign efforts or charities but those efforts may not be tax-efficient because donations to foreign charities do not qualify for charitable deductions unless such foreign charities are qualified under US tax law. Furthermore, cash and in-kind donations, even if made through qualified charities limit distribution of the funds to qualifying charities and for charitable purposes. Multinational entrepreneurs seeking to have a direct impact would need to structure the charitable planning vehicle in a manner that allows for flexibility in funding access and project qualification while remaining within the confines of a qualified charity under Section 501(c)(3) and the related US tax law.
Furthering Purpose Through Private Foundations
Multinational entrepreneurs with successful enterprises can integrate their business and charitable purposes through the strategic use of private foundations qualified under Section 501(c)(3). Supporting activities or funding a private foundation from the profits of their for profit business can provide a tax-efficiency with the business revenue while ensuring that the funds are used for purposes the entrepreneur-philanthropist supports. Some entrepreneurs structure certain businesses as benefit corporations if allowable under state laws but the structures are not as broadly recognized. A private foundation can create grants and endowments that are within the charitable activities requirements under Section 501(c)(3). However, meeting the expenditure requirements and ensuring the activities and use of the funding is within the statutory parameters is especially challenging for foreign projects because charitable organizations abroad may not be subject to the same rules and restrictions. Therefore, entrepreneurs can meet the expenditure requirement by donating funds through their foundation to “friends” of organizations, US public charities that directly give to vetted and qualifying foreign charitable organizations. This structure enables the entrepreneurs to make tax-deductible donations while supporting the missions they support abroad.
Direct Private Foundation Liaison To Further Foreign Aid
Entrepreneurs with foreign ties may also seek to support grassroots efforts in their native country to further efforts that would qualify as charitable if performed by a domestic nonprofit. However, due to infrastructure, resource and governance limitations, the efforts may be small-scale projects by communities organically forming charitable efforts. Although more administratively involved to ensure adequate oversight exists during and after the funding of a particular project, such efforts can be supported with carefully designed grants and endowments structured in compliance with the US tax code. Domestic public charities can fund foreign entities as long as the funds are used exclusively for charitable purposes as defined by US tax law. Compliance is especially critical in these arrangements because of the potential imposition of excise taxes, including the Unrelated Business Income Tax (UBIT).
Creating International Foundations Expecting Tax-Efficiency
The aforementioned direct and indirect funding and support of international charitable efforts, both through established foreign nonprofits, private foundations and through carefully administered projects further the global philanthropic aspirations of entrepreneurs while qualifying the entrepreneurs and their businesses for tax benefits in the US. However, entrepreneurs with assets abroad may create organizational structures such as international foundations expecting tax-efficiency both in the US and abroad. Although such foundations, such as a Panama Foundation, may be tax-exempt under local law, they do not qualify under Section 501 as a qualified charity and transfers to the organizations are generally not exempt from US taxes. These structures are primarily used for asset protection and estate planning. US investors holding assets in such structures may be subject to US tax in addition foreign asset reporting obligations. Failure to report and comply with the reporting obligations can carry hefty penalties and criminal liability.
Private Foundations Supporting Foreign Aid With Philanthropy
Multinational entrepreneurs and founders benefit from planning tools involving sophisticated business structures integrated with asset protection trusts and private foundations. However, where philanthropy is intertwined with tax-efficiency, especially supporting foreign efforts, the structures have to be carefully designed to ensure compliance with US laws and qualify for charitable deductions while also supporting the specific mission that are charitable abroad even though the entire enterprise may not qualify as a nonprofit. Proper governance and compliance of a private foundation can ensure that the multinational entrepreneurs philanthropic goals are furthered while providing the necessary asset protection and tax-efficiency. Considering cross-border implications of private foundations and reporting obligations instead of establishing structures based solely on the law of the location of the assets is essential especially for US taxpayers because all assets worldwide are subject to income, gift and estate tax for US citizens and residents. Additionally, administering a private foundation to provide foreign support and aid requires substantial knowledge of the private foundation and qualified charity rules under US tax laws to prevents application of excise taxes or worse, lead to disqualification of the private foundation as a qualified charity.
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