We at LAPA Fundraising are often asked, “Can we (a USA Family Foundation) make grants outside the U.S.? Family foundations can safely grant to non-501(c)(3) organizations outside the U.S. as long as they follow one of two special sets of procedures: expenditure responsibility or equivalency determination.
The five basic steps for completing expenditure responsibility are not that different from the standard grantmaking procedures used by many foundations. Those five requirements are as follows:
- The foundation must make a reasonable investigation of the grantee to assure that they are capable of performing the charitable activity that is to be funded.
- The grantee must sign a written agreement with the foundation that describes what charitable activities are to be accomplished with the funds. In most circumstances, general purpose grants are not permitted. The agreement must also contain certain limitations (such as prohibiting the use of any of the funds for lobbying).
- Unless the grantee is another private foundation, the grantee must establish a separate account for the funds. Charitable dollars cannot be commingled with noncharitable dollars.
- The grantee must provide regular status reports on the expenditure of the funds and the progress made in fulfilling the charitable purpose for which the funds are earmarked.
- When filing the IRS Form 990-PF tax return for any year in which a payment for an expenditure responsibility grant is made, the foundation must indicate that expenditure responsibility payments were made and must add a schedule to the form with a brief description of each grant indicating the grantee, the amount, the charitable purpose and the current status of the grant.
“Equivalency Determination” is a good faith judgment that the non-U.S. grantee is “the equivalent” of a U.S. public charity. The foundation may make such a determination based on either an affidavit of the grantee organization or an opinion of counsel (of the grantor or the grantee) that the grantee is a public charity. The affidavit or opinion must be based on sufficient facts and supported by adequate documentation.
What kind of documentation is sufficient? The file should be thorough enough so that the IRS will be satisfied that the determination was reasonable. Whether the foundation uses legal counsel or seeks to obtain an affidavit from the grantee, it is likely to need the same information:
- Organizational Documents such as articles of incorporation, charter, certificate of incorporation, or similar names. Bylaws (the organization’s internal governing rules) should also be obtained.
- Purposes and Activities. A detailed description of the purpose and activities of the grantee.
- Distribution of Assets. A copy of relevant statutory law, or provisions in the governing instrument, stating how the assets of the grantee will be distributed if it ceases to exist.
- Limitations. The grantee must also demonstrate that: 1) none of its assets or income will provide a private benefit to individuals; 2) its non-charitable activities or legislative lobbying are, and will be insubstantial; and 3) it will not participate in any political campaign or election on behalf of, or in opposition to, any candidate for public office.
- Financial Data. Detailed financial data for several years for organizations that are not religious, educational, or medical institutions.
Most foundations active in international funding have traditionally preferred the use of lawyer equivalency letters; however, there’s a more affordable path. Under the IRS Revenue Procedure 92-94, the IRS made it clear that multiple foundations may rely on the same affidavit. Because the affidavit format does not require incurring legal fees for each grantee, this change permits more small and medium sized foundations to make grants outside the United States.
May we help you think through your USA foundation’s international grant making? If so, please contact us to set a free 30-minute consultation.
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