Page Snow, chief philanthropic officer at Foundation Source, outlines some of the interesting but less prevalent philanthropic moves her firm's clients are making using their private foundations.

The IRS allows private foundations wide latitude to undertake creative, inventive, effective philanthropy that couldn’t be accomplished by other means. If you want versatility to bring your philanthropic vision to fruition, a private foundation is the best possible charitable vehicle within which to work.

Making donations to public charities will always be the cornerstone of foundation giving, but inspired philanthropists go beyond the simple transfer of funds to 501(c)(3) organizations. With a private foundation, the type of grantee organization is often less important than how the money will be used. Whether giving to an orphanage in India that has never heard of an IRS 501(c)(3) designation or a hardware store in Newark running a safe trick-or-treating program for kids in tough neighborhoods, the IRS allows you to fund most any charitable cause as long as you follow the rules.

1. Grant to individuals

Simply sending checks to non-profits is rewarding—but did you know you can make grants directly to individuals and families in times of need? Private foundations are permitted to provide funds to individuals for emergency relief or hardship assistance in circumstances such as loss of employment, illness, and temporary displacement.

One client provided hardship assistance to a couple burdened with devastating medical bills for their child’s cancer treatment; another gave emergency grants directly to 200 local families whose homes were destroyed by Hurricane Ivan. Whereas granting to a non-profit is one type of experience, directly supporting a family touched by tragedy can provide a profound, personal dimension to your giving.

2. Direct charitable activities

A family foundation can conduct its own charitable programs directly, instead of through a public charity, without setting up a separate non-profit or converting to an operating foundation. Direct charitable activities (DCAs) are programs that permit foundations to directly fund and carry out their own projects. This brand of “hands-dirty” philanthropy suits entrepreneurial types who want to contribute both financial and human capital to their good works. For these donors, it’s not about finding charities worthy of donations; it’s about solving a problem using their connections, capabilities and capital.

Examples of successful direct charitable activities we’ve seen include:

• Providing highly durable soccer balls to kids in war-torn countries.
• Running a small mathematics museum to illustrate to children the importance of math in everyday life.
• Providing funds to purchase business attire and remove gang tattoos from paroled prisoners looking to rejoin the workforce.

For ideas big and small, direct charitable activities allow foundation members to use their unique resources and skills to produce results that grant dollars alone wouldn’t buy.

3. Provide program-related investment loans (PRI loans)

Besides making grants, a foundation can make loans to charitable organizations and use the proceeds from the repayment of that loan to make other programmatic investments. And just like grants, PRI loans count towards the foundation’s 5 per cent distribution requirement.

For example, one of our clients wanted to fight pollution by helping a business that leases electric cars to urbanites. He loaned them the funds with a 12-month repayment period. At the end of the year, the business had more cash in the bank from its new fleet, and it was more credit worthy; and because the loan was repaid in full, the client could “recycle” the $250,000 principal, loaning it to other organizations.

4. Give program-related loan guarantees

Loan guarantees are another way to provide charitable support—often without spending a dime. One client wanted to help a local food pantry, a public charity, expand its kitchen space and fix a leaking roof. Because the food pantry lacked the credit to borrow funds at a reasonable rate, she arranged a loan guarantee through her foundation at a local bank, enabling the pantry to finance their construction costs with far more favorable terms.

5. Make program-related equity investments

Few donors realize that they can make equity investments in for-profit commercial ventures for charitable purposes out of the foundation’s grant-making budget and have it count toward the 5 per cent minimum distribution requirement. For example, The Bill & Melinda Gates Foundation invested $10 million in Liquida Technologies, a company whose technology accelerated the development of vaccines for diseases such as malaria that primarily affect people in the developing world.

Although the company had already attracted investment from traditional investors, by becoming a major shareholder, the foundation helped ensure that, beyond targeting affluent consumers, Liquida continued to invest in therapies that address the unmet health needs of the world’s poorest countries. Because the dollars are paid out of the foundation’s grant-making funds, the IRS permits these PRI equity investments even when they might not pass muster solely on their financial merits. The primary consideration is whether the equity investment promotes the foundation’s mission—not whether the risks are too high, the potential return too low, or there’s too long a time horizon for an investment return.

6. Donate internationally

Making grants outside the US holds great appeal for donors with family or ties to other nations and those whose philanthropic goals cross political borders. Private foundations can grant directly to overseas charitable organizations, even when there is no IRS-recognized 501(c)(3) entity to serve as an intermediary.

For example, some foreign charities are automatically recognized by the IRS because of their special status (e.g. the United Nations); others have set up a US-based “friends of” organization that is a recognized 501(c) (3) public charity that can accept funds on their behalf. But when there’s no easy route to channel funds to a favorite organization overseas, foundations can still make a grant by providing additional oversight, either by finding the organization to be “equivalent” to a US public charity, or by exercising “expenditure responsibility.”

These philanthropic alternatives have enabled our clients to support an after-school boxing club in England, a university in Singapore, a microfinance organization in Peru, and a home for AIDS orphans in East Africa, among many others.

7. Give awards and prizes to spur progress

One effective and often-overlooked method of driving innovation and creating buzz around one’s field of interest is to offer a prize. Traditionally, awards were given as a way of rewarding past performance, (e.g., the Nobel Prize), but modern foundations are using prizes to drive progress. For example, the first non-government-supported space flight was the product of a competition created by the $10 million X-Prize. Prize-based philanthropy spurs innovation by enabling donors to leverage the creativity of many people to innovate or solve a problem without having to support each person individually.

8. Pay expenses

Most donors want as much money as possible to go to their favorite charitable causes. But to make the best use of your charitable dollars, sometimes you need to spend money in order to save it. The IRS recognizes that education to inform your philanthropy is vital and considers such research a legitimate expense. By doing homework before putting dollars out the door, your foundation members will better understand the problem they’ve chosen to work on, learn who else is working on it, and surface multiple potential solutions.

Other allowable expenses for a private foundation include board meetings and site visits to explore and understand the work of potential grantees, and conferences or seminars in the foundation’s areas of interest. As many foundations discover, these kinds of expenditures are a wise investment of limited philanthropic dollars because they uncover new opportunities while preventing money being wasted on “re-inventing the wheel.”

9. Undertake impact investments

There used to be a firewall between a foundation’s investments and its grant-making. But a relatively new idea, impact investing, aligns a foundation’s financial investments to its mission while maintaining financial returns. Impact investment opportunities are arrayed across a full spectrum of risk. Some donors make very secure deposits in community-owned banks that are subsequently lent out to charitable causes, for instance to a hunger relief agency to purchase refrigerated trucks; others use their position as stockholders in publicly traded companies to advocate for change from within, such as proxy voting on social issues.

And some more adventurous investors invest in companies that are compatible with their mission, such as a biotech firm doing research on a rare form of cancer that affected a family member. Whether they have $2 million or $500 million, private foundations are in a unique position to use all of their assets to advance their philanthropic mission— not just cash given away to meet the 5 per cent minimum distribution requirement.

10. Make set-asides

As long as they meet certain requirements and obtain advance approval, the IRS allows private foundations to set aside funds in order to build up the reserves necessary for an ambitious future project. For example, if a foundation wants to undertake a large initiative (e.g., the construction of a building), the foundation could apply to the IRS for permission to set aside funds that may be counted toward satisfying its minimum distribution requirement in the year in which it’s made.