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Nonprofits Increase 'Gift Tax' On Donors

Wall Street Journal

April 6, 2009

 
 

By Shelly Banjo and Melissa Korn

As charities say, it takes money to raise money -- and a growing number of organizations are tapping donors for those costs through what's known as a "gift tax."

Big donors often want their entire gift to go to a specific purpose, be it a research program, a construction project or something else. To keep them satisfied, many organizations exempted those donations from being used, to any extent, for fundraising and other general administrative costs. These costs were covered by endowment profits or unrestricted gifts.

"In good times, we could afford not to charge donors" and eat the costs, says Robert Scharpe, a fundraising consultant in Memphis.

Those times are gone. Endowment plunges, a substantial dip in donations and state budget cuts have prompted more organizations, particularly colleges and universities, to try to levy fees on all gifts, and to increase those fees.

For example, someone giving $100,000 to fund cancer research at a university would see a fraction of that gift go to fundraising costs -- typically 2% to 6%, but more at some institutions.

The University of Connecticut instituted its first fees in February: 3% on endowed gifts and 5% on non-endowed gifts.

Rutgers University in New Jersey, assesses fees as high as 10% on donations. The school charges 5% in fees for gifts of $10,000 or more and 10% on smaller gifts.

"It costs so much to raise small gifts," says Carol Herring, president of the Rutgers Foundation, the school's fundraising arm.

The foundation levies a 1% management fee on the school's endowment and gets money from unrestricted gifts and university allocations. It started gearing up for a $1 billion capital campaign just as the endowment fell and budgets were cut.

Still, donors who object to the fees may have some leeway if their gift is big enough, philanthropy experts say. Organizations also may waive fees for donors giving through a family foundation whose bylaws explicitly prohibit funding anything other than program costs.

"Bear in mind this is a double-edged sword," says Andrew Grumet, a New York attorney at Schiff Hardin LLP who specializes in nonprofit law. "If 100% of donations were going to programs, there would be nothing to run the infrastructure."

Donors can always elect to give a bit more than they initially planned, say donating $105,000 instead of $100,000 to absorb the additional fees.

Either way, donors should read a gift agreement closely to see if a portion of their donation may go toward fundraising, overhead or administrative costs. Typically foundations will include fees on giving receipts, but may not notify potential donors upon initial solicitation of funds.

If an organization doesn't disclose the terms, the donor may very well have a legal basis to require the institution to waive the fees, Grumet says.

Before signing a check, donors can ask the institution to outline its overall fundraising and administrative costs and, more specifically, where the funds from their gift will go. Donors who give unrestricted gifts are more likely to see some of their money end up in the development office

"As a general rule of thumb, we find the most financially efficient organizations spend 10 cents to raise one dollar," says Ken Berger, president and chief executive of Charity Navigator, a charity watchdog Web site that tracks organizations' spending. Costs can vary by industry and specific case, he adds.

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Write to Shelly Banjo at shelly.banjo@wsj.com and Melissa Korn at melissa.korn@dowjones.com.

   
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