Category Archives: NON-PROFIT & CHARITY

This is the place to discuss non-profit and charitye related issues.

More on L3C’s (Written by Robert Lang)

A particularly well written analysis posted on LinkedIn by Robert Lang, creator of the L3C. -Richard

We’ve had various questions in recent days about the L3C and thought this particular information might be useful.

All states have no choice but to recognize L3Cs from another state as they are a variant form of LLC and every state must honor every other state’s LLCs just as you can use a Delaware corporation in Idaho. In so far as revenue rulings go, the ones on LLCs would apply. It may elect pass through status just like any other LLC and would most likely do so. The IRS does recognize L3Cs but it is not going to give them the “Good Housekeeping” seal because it is not concerned with the generic group. Its interests relate to whether any particular L3C meets the conditions for investment by a particular foundation as a PRI. This is foundation specific. What is an acceptable PRI for one foundation may not be acceptable for another. The foundation must still use due diligence and work with its attorney both to choose the investment and negotiate the operating agreement to be sure if fulfills the foundation’s needs.

An L3C can get a grant from a foundation or the foundation can make a PRI investment. There are also ways for individuals and corporations to make a tax deductible contribution that ends up in the L3C. The L3C has the advantages of the flexibility of organization under the LLC laws. If properly put together the L3C integrates mission and income and eliminates UBIT issues and the regulations regarding percentage of control that a foundation may have in a for profit. Since a PRI into an L3C can replace a grant it also does not fall under the jeopardy investment regulations.

The L3C as an LLC allows the members of the L3C to make investments, have responsibilities, receive income, and have voting power in disproportionate relationships to one another. The LLC is effectively a partnership with corporate protection. That means that the operating agreement or contract among the members, can within the framework of the law, essentially embody whatever the members agree upon. This makes the L3C very well suited to membership by a disparate group of organizations.The membership could include corporations, nonprofits, government organizations and individuals. The nonprofit, could be given total day to day control and never invest a dime.

Finally the L3C designation as a brand will come to be recognized by the world at large for what it is. The transparency and efficiency will elevate L3C organizations from obscurity to high public awareness. Once that is achieved it will be far easier to get public investment in the L3C which is the eventual goal. We need to greatly reduce the burden on the very limited resources of the nonprofit community and allow businesses to perform many of the services in our society which can be performed under a for profit umbrella. For profits make a positive financial contribution to the community. An L3C will not be exempt from property tax so its existence makes positive contributions to the community without making a hit on the public treasury.

Written by Robert M. Lang
CEO, L3C Advisors, L3C

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Filed under ECONOMY, FOUNDATIONS, INVESTING, NON-PROFIT & CHARITY, SOCIAL ENTREPRENEURSHIP, strategic philanthropy, TAX

Foundations Listen Up: Why PRI’s and L3C’s Matter

Whenever I see something that looks GREAT, I wonder if I am missing something…You know, the old; “Too good to be true”. Over the last many months, I have been doing due diligence on the most appropriate corporate structure for a film project I am working on called “Time To Impact”. The film has a social agenda; use the film to inspire philanthropy, social entrepreneurship, and civic engagement to turn around Paterson, NJ, the third largest city in the state and one of the poorest in the nation in 365 days.

The biggest concern is raising money for the film project. I wondered whether I should set up as a for profit or nonprofit. Going the for profit route didn’t seem to feel good. For one thing, I didn’t want to have a perception that we were doing this just to make money. In addition, I wasn’t comfortable being the guy who says; “Oh, this is going to be the greatest thing since An Inconvenient Truth and Supersize Me. The appeal isn’t in how MUCH people can make, but for the benefit that the film will have from a social standpoint. The pure for profit model just didn’t feel right. On the other hand, setting up a nonprofit involves setting up a 501(c)3, a process that takes many months, requires a board of directors, and other things that just seemed to be a distraction from the main goal at hand. Compound those issues with the fact that we are in a very difficult fund raising environment, we are likely to be grouped with everyone else asking for money, the grant process itself is a labor intensive process, and getting access to for profit money is less likely (if not eliminated), and the nonprofit model also didn’t seem to fit. Months of contemplation on this, and still no decision. Recently, I started taking a closer look at L3C’s.

The more I learned about L3C’s, the more attractive they looked for our film project. Over the last month or so, I have had discussions about my project with some of the top minds in country on the L3C. They seem to agree. This seems to be the perfect fit. So what’s so great?

L3C’s are hybrids of for-profit and nonprofit entities. They are a for-profit company that first and foremost has a social agenda, and making money secondarily. This seemed to address my concern about the issue of perception of my motivation of “doing this just for money”. My understanding is, there are no limits to the profit, as long as the mission is socially oriented. Second, and what I perceive as most beneficial and cutting edge, is the fact that L3C’s automatically qualify as “Program Related Investments” (or PRI’s) for foundations. This is a big deal. Why?

According to Foundation Center, Program-related investments (PRIs) are investments made by foundations to support charitable activities that involve the potential return of capital within an established time frame. PRIs include financing methods commonly associated with banks or other private investors, such as loans, loan guarantees, linked deposits, and even equity investments in charitable organizations or in commercial ventures for charitable purposes.”

So what does that mean? It means a lot. Foundations are required by the IRS to give away 5% of their assets each year in order to maintain their tax status with the IRS. Traditionally, this 5% takes the form of grants to 501(c)3 charities (the kind we would have been). As a Certified Financial Planner™ Professional, I look at the 5% requirement this way. Starting with 100 percent of the foundation’s investment portfolio, 5% is given away. Those grants hopefully are being given out to worthy causes who will “invest” the money effectively and use it prudently, however it is difficult to determine what the “social return on investment” actually is because in many cases it is difficult to measure the actual social return. I could write another entire column on just that subject alone, but let’s not go there right now. So what is the actual social return on investment of the 5% money? Enter the L3C.

L3C’s are businesses just like any other. Good ones should have a tight business plan and expectation that they are going to earn a profit or else they would not exist. If a business goes to a bank for a loan, the bank wants to know what the likelihood the loan is going to be repaid. That is determined largely on the strength of the business. The BIG deal with the L3C and for the foundation, is that a foundation can invest in the L3C and has the opportunity to actually earn a return on the money. Better yet, the foundation’s investment into a PRI (L3C), COUNTS toward the 5% they must give away each year. Ok let’s stop and recap now.

From a purely capitalistic “non social” viewpoint for a second, the 5% given away represents a 100% loss (looking at it strictly as an investment). Foundations give to good causes which is why they are able to get a tax deduction for the contributions when money is put into them.

If a foundation has an opportunity to earn a return on money and get it back to give again by investing in profitable social business ventures, AND it counts toward money they must give away anyway, why aren’t more foundations doing this?

In an environment of depressed investment portfolios, isn’t this a wise thing do do?

Worst case, the investment doesn’t make money and you lose your investment. Consider it a grant, which is what you are already doing anyway.

Am I missing something here?

If I have piqued your interest, watch the video below. (I’m “The Philanthropic Advisor” in the trailer)


Foundations, let’s make a difference and turn around a city. Please consider helping us fund this film. Email me at rich@timetoimpact.com to inquire.

Join the Movement:

Time To Impact Website

Facebook Fan Page

Time To Impact on Twitter @ImpactMovie

Richard J. Krasney on Twitter @PhilanthropyCFP

Richard J. Krasney on LinkedIn

By the way, nothing in this should be considered legal or financial advice and you should not rely on my opinions or the information expressed here in place of doing your own due diligence. Consult your financial professional before making any important financial decisions. This is just my opinion. End CYA.


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Filed under ECONOMY, FOUNDATIONS, INVESTING, NON-PROFIT & CHARITY, SOCIAL ENTREPRENEURSHIP, strategic philanthropy, TAX

Philanthropic Analysis Paralysis

Face it, many of us “wonks” (which I lovingly use) in the philanthropic sector have become enamored with being able to measure things. We also like to complain a lot when we can’t measure something.

Lately, all of the talk has been on the various ways to measure an organizational outcome. Under Ken Berger’s leadership, Charity Navigator has set a new course and begun studying ways to incorporate measurement of outcomes into their charity rating system. I applaud Ken and Charity Navigator and believe that for too long, we have not been focusing donor attention on the entire picture. It is inherently good to ask the question, “How effective have you been at actually achieving the thing we’ve been giving you money for?”. To be able to create mechanisms that address that question could potentially have a huge impact and be a game changing moment for the nonprofit sector.

In my work as an investment adviser, I choose investments to put money into. For the most part, I frankly don’t care how much a company spent on advertising expenses or other overhead costs, I care about their earnings. I care about their dividend. I care whether the company is growing or contracting. I care how much market share they have relative to their competitors. These and other things tell me how healthy a company is. While it is useful to compare the overhead of Home Depot to Lowes, it is pointless in my opinion to compare it to Johnson & Johnson if you are interested in the metrics of the home improvement business. They do completely different things. Measuring the right things is something that we’ve done a poor job at and it seems like good people are committed to making real improvements to how we track effectiveness. This is long overdue. Have we missed something along the way though?

When I first started becoming interested in philanthropy as part of my business, I wanted to help charities tell the planned giving story. When I went to become a Certified Financial Planner™ Professional, I saw the tax wizardry of Charitable Remainder Trusts and was amazed when I saw that one could potentially leave more money to heirs through the use of these and other kinds of charitable vehicles. I thought, “Wow, why doesn’t everyone know about this?” I felt that many more people would give to charity if they knew what kind of tax benefit they could get and that if heirs actually wound up receiving more in the process, well that would certainly be a win for everyone but the government. Over time, I learned that while many people do give for tax reasons, more give because they are inspired to do so for one reason or another. They give from their heart. They give to give something back or to make a difference.

While the measurement issue is a critical one, let’s not lose sight of the fact that we also need to be focused on showing people the way into philanthropy. We need to be creating opportunities to make new philanthropists by showing the world that we all make a difference and have the ability to do so. I discovered philanthropy. A business coach asked me to write my own eulogy. After a few minutes of sitting there, staring at him, and thinking about the question, I answered. I said, “I guess I would want people to say I made a difference…” The rest is history.

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Filed under ESTATE PLANNING, FINANCIAL PLANNING, FOUNDATIONS, NON-PROFIT & CHARITY, SOCIAL ENTREPRENEURSHIP

Is Obama’s Estate Tax Plan The Nail In The Nonprofit Coffin?

We folks who deal with high net worth clients have wondered for years what will happen with estate taxes when the current plan sunsets in 2011. Let me make a guarantee here (which is something I don’t often do). I guarantee that estate taxes will be addressed before 2010 which is when they are set to return to zero and return to 2001 levels when 2011 begins. Already, congress is abuzz with talk about what to do about it. Frankly the estate tax has been the running joke in the planning community for years when congress said that the estate tax would disappear in 2010. People said that they would start to write special instructions for “pulling my plug”, but only if it were advantageous from an estate tax planning perspective. All kidding aside, regarldless of what gets decided, I guarantee that there will be implications. As The NY Times reported in 2005, the last time there was talk about eliminating the estate tax, charities remained shockingly silent for fear that any attempts to block the measure would be donor suicide. I mean really, would you give to a charity that intentionally lobied for higher estate taxes? Are you crazy? Make no mistake, this time, I guarantee there will be legislation being passed and it will have a major impact on both the wealty, and nonprofits.

While many in the nonprofit community have been quite vocal against Obama’s plan to lower the charitable tax deduction, if history is any guide, I don’t think they will be speaking up now. Perhaps they should. I believe that the changes to the estate tax will have a much bigger impact on charities than the income tax deduction. Charities felt that they had nothing to lose by speaking up on the proposed change to the deduction because the change would be bad for BOTH the wealthy, AND the charities. By lowering the deduction, the wealthy would be losing a tax incentive to give to charity (perceived as bad for the wealthy), and the charities would be hurt by that. Nobody had a problem speaking up to say this was a bad idea. The estate tax is a completely different animal and I would argue, will hurt charities much more than the income tax deduction. Have you heard anyone talking about this? Nope. This will be a silent walk to the grave for the nonprofits. Here’s how it will happen.

Year/ Exclusion Amount /Max Top tax rate:
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 repealed 0%
2011 $1 million 55%

In the above chart, notice that the estate tax exemption amounts have been going up since 2001. From 2001 until 2008, the exemption amounts didn’t go up that much; essentially from $1-2 million. The period from 2001 to 2002, up until recently, was the worst period of time for the markets since the great depression. While the exemption amounts did go up slightly from $675,000 to $1 million dollars, that was not a big increase in real dollars for the wealthy. From 2003 up until 2008, the stock market experienced a bull market while the exemption amounts only increased from $1 million to $2 million. This year however, the exemption amounts went to $3.5 million. That means that a husband and wife can leave $7 million dollars free from federal estate taxes. Compare that to only $2 Million total in 2002 ($1 million for each individual), and that’s a lot of extra millions. Let’s add somthing else here. Portfolios are down much more than the last recession. This means that exemption amounts are much higher, and people have less money. Well that’s great for the wealthy right? How about for the nonprofits? They are still talking about how the drop in the income tax chariable deduction is going to impact them. Folks, wake up, you have a new problem. It’s called the estate tax. While nonprofits have had lots of other things to deal with lately, I fear that what’s being discussed with the estate tax is going to be yet another blow to their ability to continue to operate as they had been.

Before the wealthy shoot me here, let me point out that there’s a fine balancing act that needs to take place here. Nonprofits play an essential role in society and they perform many responsibilities for society that the government isn’t good at and has no place in. If charities are not fundamentally strong, society is worse off and someone else needs to pick up the slack. If the government needs to do more, guess what, that means we all will wind up paying higher taxes anyway. It’s in our nation’s interest to make sure they remain financially healthy.

At present, the latest word on the street is that the Democrats support leaving the estate tax at the current level of $3.5 million. The exemption amount has never been this high before and only time will tell how much of an impact that will have on charities and donations. In my business, avoiding paying estate taxes is one of the primary functions that a wealth manager helps clients peform. While emotion has been the primary driver of charitable contributions, not taxes, I fear there’s a perfect storm that is lining up. For many in the wealth managent community, charity is only a means of avoiding taxes for their clients. Unless an adviser can use charity as a way to save taxes for their clients, they generally don’t bring it up. Doing so means less under management for the adviser and that translates directly to less fees. I assure you, right now, many advisers are just struggling to keep their doors open and discussing charity with their client is the last thing on their mind. The big question is, how many potential donors were lost by dropping investment portfolio values, raising the estate credit amounts from $2 million to $3.5 million, and cutting the charitable income tax deduction?

Just to be clear, I would be in favor of  freezing the estate exemption limits. I feel people pay enough in taxes and they shouldn’t have to pay again when they die. Make no mistake though, this will be another blow for charities. Don’t drop the charitable tax deduction, raise it, by a lot. I’d also be in favor of paying higher income taxes to pay for things like universal health care, education, and alternative energy. I realize you can’t have your cake and eat it too, I just worry that the cake recipe is looking like pie and we’re all going to get some in the face if we don’t think these things through more clearly.

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Filed under ESTATE PLANNING, FOUNDATIONS, NON-PROFIT & CHARITY, TAX

Anderson Cooper 360 Story on Obama Plan to Cut Charitable and Mortgage Tax Deductions

Charity Navigator CEO, Ken Berger talked with CNN’s Anderson Cooper about Obama’s plan to cut the charitable tax deduction.

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Proper Nonprofit Twitter Etiquette

Are you representing your nonprofit organization on Twitter? Are you trying to use Twitter to get the name of your organization out there and possibly get new donors? If so, you had better listen up, and fast. There are a couple of things you should know before you start to make enemies on Twitter. You might call these the rules of the road. While it’s good advice for anyone looking to make new contacts, it’s particularly important for nonprofits.

  1. Follow people who follow you- This is one of the dumbest mistakes I see people making with Twitter charity profiles. My username on Twitter is “PhilanthropyCFP”. If you are a nonprofit, why wouldn’t you follow back someone with the word “Philanthropy” in their name? That’s just dumb. If your objective is to recruit people to follow your cause, the first rule is to follow them back. There are no exceptions to this rule in my opinion. If you don’t follow someone who has expressed an interest in your charity profile, not only will they likely be upset because you weren’t interested enough to follow them back, but they will find another charity who is “interested in them”. This is dumb. Don’t make that mistake. I can’t tell you how many nonprofits I have unfollowed because they didn’t follow me back. While I’m not making myself out to be anyone “important” here, the bottom line is that it is a lost opportunity. We’re in the same industry, yet for some reason, their organization wasn’t interested in what I had to say. I say “NEXT”…
  2. ReTweet interesting articles that people post. If you are generous, people will return the favor and your followers will grow.
  3. Post interesting content (Not just yours). Did you read an interesting article that your followers might find interesting? Great post it. Useful Twitterers will increase their followers.
  4. Show your personality (as long as it isn’t negative). In my case, it’s my company and I can be negative if I want. If people don’t like what I have to say, they can look elsewhere. I’m positive most of the time, but as my friends know, I do take a stand when needed (like here).
  5. My favorite: “Tweet others like you would like to be tweeted”

Twitter can be a great way to meet people for any number of reasons. Just understand these basic rules and you should be just fine. If anyone has other suggestions, please feel free to add them here.

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We Forgive You Mr. Madoff: Love, Advisors, Nonprofits, & Jewish Community

Dear Mr. Madoff,

We in the Investment Advisory, Nonprofit, and Jewish community forgive you (well maybe not EVERYONE) Let me explain:

About a week ago, I asked people if you could ever be forgiven for the crimes you have committed against charities who help to make others lives better, your own people in the Jewish community, and from advisers in the investment business (which happens to be the same business I’m in). I asked the question whether you could ever be forgiven, not because I believe that you ever will, but because I wanted to know because of my own sense of religious curiosity, whether someone who had committed the crimes you had could ever be forgiven in the eyes of god.

Prior to today, I wondered and questioned whether it was even plausible for someone who had the reputation that you did, to knowingly deceive your fellow Jews, charities who help people, and innocent investors who turned over their life savings to you. I didn’t think that anyone had it in them to be able to look someone squarely in the eye when someone turns over their life savings to you (lot of trust there right, I know, because I have these same conversations every day with people), and KNOW the way you DID that you were GOING to bankrupt them. You looked people in the eye knowing you were going to ruin them.  Whoever read my previous posting on this subject, please forgive me.

Today I learned the truth. You are a monster. You knew exactly what you were doing. Sometimes when the train has left the station, it’s difficult to admit when we have done something wrong. We may tend to ignore difficult things because we don’t like to deal with them, perhaps because we are afraid. Sometimes there are consequences for this.  That’s not what happened in your case though. With you, you knew what you were doing was wrong, you SAID you knew that one day it would catch up with you. Why would you CONTINUE to lure more victims when you knew would get caught? You took money from charities, Jewish ones, as a fellow Jew. You took from CHARITIES and gave to YOURSELF. The enemies of the Jews are rejoicing for what you have done. You ARE a terrorist of the worst kind. You ARE a monster.

Ruth Ann Harnisch and I exchanged a series of emails about you after she posted a comment on my article about you where I questioned whether it was possible for someone to knowingly do what you did. I couldn’t believe it. Perhaps I’m a softee and believe that people deep down want to do the right thing. Ruth Ann Harnisch didn’t think I was looking at reality. She was right. You are the monster. We already know that now though. The discussion that we proceeded to have is worth repeating to others. It has to do with forgiveness. This was the question that I had originally asked. Could you ever be forgiven? The answer we came to was YES.

The kind of forgiveness we are talking about is the same kind of forgiveness someone has when a serial killer murders their child. We forgive the act. We forgive, because WE don’t want to hold on to the poisonous venom that we feel for you for what you have done. We forgive because forgiveness is good for us, Mr. Madoff, not for you. Make no mistake Mr. Madoff, you ARE a murderer.

As I looked into “forgiveness” further, I came across the story about “casting the first stone”

The King James Version of the Bible, in John 8:1 – 11 scribes and Pharisees had caught a woman in the act of adultery (the woman commonly referred to as the prostitute) and told Jesus who was teaching in the temple that the Mosaic Law required she be stoned to death. Trying to make an opportunity of this to trick Jesus that they might accuse Him, they, with stones in hand, asked Jesus what He says about the Law. After Jesus tried to ignore their repeated questioning, He told them “He that is without sin among you, let him first cast a stone at her.” One by one each man dropped his stone and walked away.

Jesus was not arguing with the judgment. Nor was Jesus arguing the law nor the woman’s guilt. Jesus was arguing with our right to execute the woman. Once all the men had dropped their stones Jesus confronted the woman and asked her if any of the men were still there to condemn her. When she answered “No man, Lord”, Jesus told her that neither did He – He forgave her of her sin. He did not excuse the sin of adultery/prostitution, he forgave her of it. All that is sinful before forgiveness is still sinful after forgiveness. Not only was Jesus not afraid to call a sin a sin, He was not afraid to call a sinner a sinner. He even reminded her of the sin of adultery/prostitution by telling her “Go and sin no more.”

I asked my Rabbi about the process of asking for forgiveness when you have committed a sin against another. He told me that in Judaism, part of  repentance is the process of providing some form of restitution. Another smart man named Randy Pausch, whose “The Last Lecture” became an instant classic about how to live said this; “When you do something bad and want to apologize, know that a good apology has three parts.  1) I screwed up 2) I’m sorry 3) (This is the part most people don’t do) How can I make it right?”

Today in court Mr. Madoff, I heard you say you screwed up, and that you were sorry. What I didn’t hear was any interest in making good on the wrong you had done. READ WHAT MADOFF TOLD THE JUDGE Fortunately for you Mr. Madoff, you will have a lot of time to figure out how to make it right. Frankly, I’m not interested and don’t really care what you do. I’ve learned that to forgive, does not necessarily mean you have to “receive” someone back into your life. So with that Mr. Madoff, I’ll let you know that I’ve forgiven you, and now I’m done with you.

“You Go, and Sin No More”

SINcerely,

Investment Advisors, Nonprofits, and your friends in the Jewish community

Read my earlier post Can Madoff Ever Earn Forgiveness?

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