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How to prevent a charity from ‘misusing’ your donation

by on
in Small Business Tax

Donations to charities offer tax savings as well as the chance to support your favorite cause. But don't let a charity use your money for causes you don't support. A bit of advance planning can make sure your dollars go where you want.

How can a donation 'go bad'? In one case, a private foundation provided a $250,000 grant to fund scholarships for nursing students at a northeastern college. When the college ran into financial trouble, it closed its nursing school and Rev. Sun Myung Moon's Unification Church bailed it out.

The private foundation tried to reclaim its donation, but it lost in court. Once the grant was made, the court said, it was out of the foundation's hands.

Advice: To avoid such situations, be specific when making the gift.

For example, if you donate a painting to a museum, ensure the recipient signs a pledge not to sell, exchange or lend it out in perpetuity.

But that's still not enough. You also need a "then what" clause in the agreement. If the charity doesn't live up to its word, a course of action is spelled out. The clause must be handled correctly to be effective.

The wrong way: requiring that the gift be returned to your heirs. That provides the IRS grounds for asking your heirs to repay all the income taxes and estate taxes that were originally erased by making the donation, plus accrued interest.

The right way: naming a second charity as a contingent recipient. That offers the secondary recipient standing to snatch your gift if the primary recipient reneges.

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