Are Charities Wasting Your Donations?

Are Charities Wasting Your Donations?

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So far in our series, we have looked at why people give and how to optimize your giving through various charitable vehicles. Next, we’ll tackle a thorny topic: are charities wasting your donations?

Even though high net worth Americans trust nonprofits more than three times as much as Congress to solve domestic and world problems, you should still exercise prudent care when selecting charities.

2014 U.S. Trust Study of High Net Worth Philanthropy

2014 U.S. Trust Study of High Net Worth Philanthropy

A recent FTC lawsuit against four connected cancer charities highlights the danger of making donations to worthy sounding causes without performing proper research.  These charities allegedly bilked donors out of $187 million and “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation.”

How do you make sure your charitable donations end up where you intended? According to a 2014 U.S. Trust study, almost 80% of high net worth donors vet their charities through direct engagement (volunteering, etc), but less than half dive into the actual numbers. A lot of time and effort went into creating the assets you donate. Shouldn’t you take time for thorough due diligence before donating?

Source: 2014 U.S. Trust Study of High Net Worth Philanthropy

Source: 2014 U.S. Trust Study of High Net Worth Philanthropy

Start your research with the charity’s latest 990 report.1 If the charity is reluctant to share this information, move on (quickly). Here are a few key items to check:

Low overhead

In the 990, look for total revenue (page 1), plus the amount spent on services (line 13), the amount spent on management (line 14), and the amount spent on fund raising (line 15). Divide revenue by the total of lines 14 and 15 for a quick check on the operational costs of the charity. This should generally be under 35%.

Smaller, newer charities might have a higher number due to start-up costs.  Ask about their plans to reduce expenses in future years.

Mission

Listed in Part III of the 990. Is the charity’s mission clear and detailed?

Related-party transactions

Do members of the nonprofit or their family members do business with the organization? If so, you’ll want to follow-up. (990 part IV, lines 25-28)

Internal controls

Look to see if there has been a “significant diversion of assets” – aka theft. (990 part V, line 5)

Annual report

Did the charity go through an independent audit process? The annual report will often include this information. It gives you greater assurance that the numbers in the 990 are correct.

Red Flags

  • Fund raising expenses equal or exceed what the charity spends on services
  • Excessive compensation or operational inefficiency
  • Assets shrinking over time together with flat or growing liabilities

If you aren’t sure where to find the 990, it is almost always available online, along with further operational information, objective reviews, and ratings for many charities. Here are a few excellent databases and tools to help in your research:

You’re now equipped to confirm your charitable donations go to reliable and efficient organizations.  Does this mean your generous giving is making the biggest impact possible? Next in our charitable giving series – exploring effective altruism.

  1. A public annual IRS filing for tax-exempt organizations with gross receipts over $50,000
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Jordan Kunz

Jordan Kunz is passionate about problem solving and using technology to make the financial world more transparent and accessible. Jordan is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ professional. He is currently an advisor at Colorado Financial Management in Boulder, CO.

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