On the Money Trail: Where Charity Begins

By: A. B. Jacobs

Those of you who follow this column regularly expect to encounter the subject of money. Since that's what you've tuned in for, I'll not disappoint you . . . well, not exactly, though I must warn you that this time I'll not dwell on the process of making money, but, rather, on its disposal. I want to discuss giving it away. If you're asking why I advocate giving it away, the reason is simple. In the final analysis, there's a practical limit on personal consumption, beyond which satisfaction is marginal. At some point in our finite lives there must be more than mere acquisition. In this world you'll find deserving people, and the opportunity to share your bounty in a meaningful way is exactly that—an opportunity. There is satisfaction in giving back a portion of your good fortune, and this is the time I've chosen to discuss it. Fair enough for a reason, I hope. But perhaps you consider the month of May a strange time to focus on benevolence. Admittedly, the subject is customarily relegated to the end of the year when tax deductions are sought. However, this is the season that's most meaningful for me. You'll understand why shortly.

Before I get into the details of generosity, I want to pass on a few observations concerning America's charitable foundations. The more than 850,000 philanthropic organizations that solicit grants and donations, and which presumably exist to bestow beneficence as provided in their charters, function in a strange sphere of unreality. Of the $241 billion in public donations these organizations received in 2002, a huge portion of the funds never saw their way to any intended purpose. As to applicable rules, federal law provides that private foundations need donate no more than 5 percent of their assets each year to retain their non-profit status. Add to this the provision that administrative expenses such as salaries and rents may be included in that 5 percent and the results are predictable. The actual philanthropy of many foundations is abysmal.

This leads to a fundamental question: What eventually happens to these massive unspent amounts? Anyone with an understanding of mankind knows exactly what happens.

Human nature is such that insider abuses of any organizational system are, and always have been, integral to the system, not aberrations from it.

Very simply, those who control the operation tend to pass benefits on to themselves and their cohorts.

A few statistics over the past few years will give you an idea of how it works. In 1997, the average giving by 26 major foundations, each worth $1 billion or more, was 4.7 percent of assets. To put giving in perspective, expenses and overhead are included in this category. Consider 2001, when the nation's 64,000 foundations, then worth about $371 billion, donated a mere $23 billion for charitable purposes. Of that sum, $4.3 billion—some 16 percent—represented overhead.

But the real puzzle is determining how the assets are used. Let's look again at 2001. In that year the directors of the 20 wealthiest private foundations each received more than $400,000, even as the value of their investments sagged. Add to that the practice of nonprofit organizations to provide their senior officials with elegant accommodations, plentiful benefits, and loans that are often subsequently forgiven—in emulation of for-profit corporations—and the picture begins to come through clearly.

You might ask whether there's some way of distinguishing the good charities from the not-so-good ones. Within certain limits, yes. Statistical data, mostly based on the IRS Forms 990 filed annually by all non-faith-based charities earning more that $25,000, is available. However meaningful evaluation often requires reading between the lines—a tough job if you don't know what to look for. In getting down to fundamentals, I believe in ensuring that the ultimate recipient is both deserving and identified. This, of course, rules out the regular charities as there is no way ever to know what happens to the huge sums that annually disappear into such organizations.

So where do we go from here? My belief is that charity begins at home . . . though not with the cynicism normally intended. There is another way to target your donations that I've employed. Let me suggest how this might be done. Imagine for a moment that you are an architect with a love for your profession. What better gift might you make than to enable young engineering and architectural students to pursue that career? You can establish a private non-profit educational foundation into which you will contribute sums of money. These funds will become available for scholarships to students chosen by the foundation directors whom you select, perhaps faculty members at a nearby college. Selections will normally be made in May at the end of each academic year. The students will receive payments, say on a monthly basis, while pursuing their degrees at a university as long as they continue to perform satisfactorily, and it will be your task to monitor their performance. Not only do deserving students benefit directly to the extent of nearly 100 percent of your contributions, but also your donations to the foundation qualify as deductions on your tax return. That is something we can all appreciate.

Al Jacobs has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody's Fool: A Skeptic's Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting http://www.onthemoneytrail.com/.

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