Why the super wealthy operate nonprofits

Super-wealthy Americans are occasionally in the news for donating lots of money for one cause or another. In 2018 alone, the top 50 biggest donors gave a whole $7.8 billion to charitable causes. What is usually not mentioned in the news is that many of the wealthy donors own and run the nonprofits to which they donate. Some of the nonprofits have been around for many decades, while others, like the Bill and Melinda Gates Foundation, are fairly new. Even celebrities are forming and controlling their own nonprofits. Official statistics indicate that there are at least 1.5 million nonprofits in the USA. The reason why so many nonprofits are being formed is that there are advantages that come with operating them. 

TRUiC helped more than 250 000 Americans to start businesses. We relied on their guide to better understand nonprofits – and this is what we could glean from it:

Why do the super-wealthy operate nonprofits?

Some super-wealthy people operate nonprofits because they genuinely believe they have the answer to a particular social problem, or because they really want to help the unfortunate or because they have the money and influence to make an impact. Others want to focus on an issue they care about and maybe look good while doing it. As Joseph Lizyness, a philanthropist and investor who founded Giraffeup says: “We invest in people and good causes too, but for this we need the right vehicles. Nonprofits give us the edge to do good in the world”. 

The second reason is: donors get tax benefits by donating to nonprofits. However, rather than giving to a number of charities, most donors prefer to donate to their own charities or foundations. The donation can be in the form of cash or an asset or property. The donor immediately gets up to 40% tax advantage through the donation, and subsequently benefits indirectly through the nonprofit because he controls how it distributes funds. As Michael Stemley, author, coach to the stars and accountant says: “Tax efficiency starts with your structure: you’ve won half the game already by setting up businesses correctly”. 

Another way of using a nonprofit advantageously is through donor-advised funds (DAF). The wealthy person contributes personal assets, cash, real estate or stock and immediately gets the maximum tax deduction from the IRS. He/she then names the DAF account, its advisors and any charitable beneficiaries or successors. The contribution is put into the fund, is invested and keeps growing year after year. Occasionally, the donor will recommend a grant from the account to qualified charities, but it is normal for a DAF to grow indefinitely. Effectively, the donor has a tax benefit from the donation and retains control over how the money or assets held in the DAF will be used.

The use of nonprofits has not escaped politicians either. Forming and controlling nonprofits is a new way of self-promotion that politicians from both parties are adopting as soon as they take office. The nonprofits can raise unlimited amounts of money in secret donations that they can spend on promoting officeholders and their agendas. Such nonprofits are popular at every level of government.

One tax avoidance strategy is to donate property to a trust because it never has to pay income tax on the donation. A charity is not legally required to spend much of its wealth. It is only expected to spend about 5% of its investment assets annually, maybe on administration expenses, not necessarily on the charitable purpose that it claims to serve.

So, who benefits? The donor and the family can benefit. A billionaire can set up a nonprofit that will be controlled by one of his children. The child then gets a job in the nonprofit and a salary for life, and may even live in a mansion owned by the nonprofit. He controls but does not own the trust, and therefore the assets are protected from divorce and creditors. It’s a great arrangement for the heir because. Meanwhile, the parent never pays taxes on the money spent to set up the charity, and possibly avoids paying tax on the appreciated asset. There is no estate tax on this donation. At the end of the day, the lion’s share of the benefits of the donation is realized by the donor and the heirs.

Obviously, a number of advantages come with owning and operating a nonprofit. Anyone who wants to form a nonprofit, either for a worthy cause, or for the advantages that it can offer can visit this site for the comprehensive guide prepared by TRUiC.

While you are here, watch this video on unique business ideas from TRUiC: