When looking back on 2019, most people probably wont list the criminal saga surrounding the Donald J. Trump Foundation among the years biggest news. But this saga could prompt legislative changes affecting the future of the tens of thousands of other private foundations in the United States.
The Trump Foundation, which has agreed to dissolve, was accused of a broad pattern of illegal activity, including repeated and willful self-dealing transactions. President Donald Trump, himself, has been ordered to pay $2 million in damages to settle claims related to the misuse of funds. That money will be distributed to a group of reputable charities. In essence, theyll become a means for the Trump Foundation to right some of its wrongs.
The wrongs were not insignificant, including numerous expenditures garnering personal benefit to Trump and his family members, solicitation of funds in New York without proper registration and grants used for political purposes, to name a few. But the saga is bigger than Trump. And the issue is much larger than the Trump Foundation, which is just one of almost 100,000 private foundations in the country, according to 2015 IRS statistics.
These organizations receive and invest charitable donations, usually from a small handful of individuals, and typically just one the founder. The aim is typically to donate at least 5% of the value of the investment to public charities each year, hoping the investment yield on the remaining principal will replace those donation dollars, allowing for a significant donation in the following year.
In my career as a private practice certified public accountant, I have personally been involved with tax lawyers making the pitch for creating a family foundation. It usually goes something like this: Perpetuate charitable gifting from the foundation in your name for years to come and teach philanthropy to your family generations down the line as they participate in the process of deciding which charities should receive the annual 5% minimum distributions. Sounds good, yes?
Then comes the follow-up pitch which often seals the deal for a nice professional fee to the lawyers and accountants to establish the foundation. It goes something like this: You privately control the charity, you and your family can pay yourselves a reasonable salary for your efforts to support the professional services needed by the charity to function and on a reasonable basis you can meet periodically at family retreats to discuss foundation business, with all reasonable expenses paid for by the foundation. Theres a lot of potential for abuse with that word, reasonable.
The law of private foundations in America is complex, but, for the record, at its heart the statute gives it a good college try to regulate the potential abuses that can occur. For example, the law all but prohibits any form of gaining personal benefit between the foundation and the insiders to the foundation. Known under the category of self-dealing, this is the source of many of the charges against the Trump Foundation. The problem is there is not enough accountability.
A big question is: Who is checking up on the many private foundations that exist? The IRS lacks sufficient personnel dedicated to this cause, and while foundations have to disclose their financial statements annually to the public, even the public watchdog groups out there have their hands full. Notwithstanding the public disclosure requirement, any impropriety can be well hidden within the numbers. The statute establishing private foundations goes back to 1969 and since then there has not been a major overhaul of the reporting requirements something now long overdue.
Perhaps an even bigger question is: How is the public sector of our economy helped with the more than $950 billion of funds parked away for future giving? What programs remain underfunded today because of those 5% practices? These well-heeled family foundations could easily exceed the 5% threshold in donations to the public, but most view the 5% as a speed limit an amount not to exceed.
What the Trump Foundation scams have done is shine a light on foundations, on the paltry rules and oversight they face, and the paltry donations they lend. Every few years, theres a push on Capitol Hill to change how foundations are regulated or to ban them outright. But then the issue goes away. Its almost as though there hasnt been a scandal high profile enough to make the change seem worthwhile.
My bold prediction? 2020 could change that.
About the writer: Samuel Handwerger ([email protected]) is a certified public accountant and a full-time lecturer in the University of Marylands Robert H. Smith School of Business Accounting and Information Assurance Department.
