How to Vet a Charity
By Pete Benson, Co-founder of Beacon.
If you’re looking for a charity to donate to, there are well over a million legitimate charities to choose from in the U.S. alone—but countless other “charities” are actually fraudulent organizations. Some of them even use names that sound like a well-known charity to purposely trick donors.
So, before you give, it’s important to vet your charity of choice. They should be aligned with your values and the way you believe a charity should be run, and be legitimate. Let’s talk about how to vet a charity to make sure it’s valid and genuine.
3 Things to Consider When Vetting a Charity
Vetting a charity can be complicated for a number of reasons. Their public financial records might be years out of date, or hard to make sense of without a degree in accounting. Even a trustworthy charity may direct their funding to their stated cause rather than paying someone to update their website with clear and accurate information.
This can confuse an uninformed giver, as good charities are spending more time helping others while slick, sophisticated-seeming organizations may use donations less efficiently. Here are three factors that can bring clarity to your giving decisions:
1. Budgets, Expense Reporting, and Financial Statements
Transparency is everything here. The charity you’re considering should have a public, board-approved annual budget that details projected expenses for fund raising, program activities, and administration costs. Their financial statements should also be publicly available.
An example of a red flag in this area would be an expense report with zero dollars spent on fund raising for the year. The Better Business Bureau puts it this way: “Statements which inaccurately claim zero fund raising expenses or otherwise understate the amount a charity spends on fund raising, and/or overstate the amount it spends on programs will not meet [our] standard.”1
You should be able to find their budget, expense reports, and financial statements published on their website.
2. Fundraising Efficiency
You’ve got to spend money to make money, and charities are no exception. Whether it’s a small-town 5K or a gala with 5,000 people on the guest list, fundraising events cost money to put on. The important thing is that the majority of your donation actually goes to the cause you care about. So, how efficient is your charity in this area?
Forbes has found that, for the top 100 charities in the U.S., it costs an average of 9 cents to raise $1.2 This is an efficiency rate of 91%. You should determine your own threshold for what you consider an efficient nonprofit. The Better Business Bureau finds anything over 65% acceptable, while Forbes has a slightly higher standard of at least 70%.3, 4
You can do the math yourself by finding their financial reports on Google, or using a website like Charity Navigator. Charity Navigator will show you a nonprofit’s expense ratio so you can see what percentage of your donation is used for running the charity versus going directly to the cause.
3. Tax Exemptions
Tax planning is a valuable tool to help maximize your retirement, and giving to a tax-exempt nonprofit is a win for everyone. In order for your donation to qualify for a tax deduction, your charity must qualify for tax exempt status as a 501(c)3 with the Internal Revenue Service (IRS). To make sure they qualify, use the IRS Tax Exempt Search tool.
Doing this quick check is especially important for retirees over age 70 who want to use charitable distributions for their required minimum distributions (RMDs). According to the IRS’ website:
“RMDs must be taken each year beginning with the year you turn age 72. The RMD for each year is calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy. Use the Tables in Appendix B of Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). RMDs are not required for your Roth IRA.”5
If you have questions about RMDs, or how to use charitable giving to help you save on taxes in retirement, schedule a free consultation with one of our trusted financial advisors.
How to Choose a Charity to Support
It’s important to be an informed giver, whether writing a check for thousands of dollars or dropping change in a local fundraising jar. Vigilant vetting is an important part of philanthropy. Be sure to get the full name of the prospective charity soliciting your money, because the first and easiest line of defense is to use a quick Google search with the name of the charity plus words like “scam” or “complaint.”
For more in-depth investigating, check out the following government and charity watchdogs to research a specific organization:
- Forbes’ annual list of 100 largest U.S. charities
- IRS Exempt Organizations Select Check
- Better Business Bureau Wise Giving Alliance
- Charity Navigator
- State charity regulator office
And here are some general guidelines when choosing an organization to give to:
- It’s a good idea to have the cause or charity you’d like to support already in mind rather than be swayed by a cold solicitation.
- If you do get a call, email, or mail request from a charity with which you’re not familiar, don’t feel rushed into making a contribution.
- A legitimate charity should never try to pressure you to pledge money before you have a chance to do your own research; it should be willing to take donations at any time.
- Keep in mind that many legitimate charities contract with outside telemarketers to make these types of calls, so a portion of your contribution will go to pay that marketing organization. Consider if that’s how you’d like your charitable gift to be used.
Charitable Giving In Your Retirement
Have you thought about the lifestyle you want to have in retirement, and the legacy you want to leave? For many of our clients, charitable giving is one of the most rewarding pieces of their financial plan. Generosity is a meaningful way to leave a legacy. We love this sentiment from Warren Buffet: “Giving is painless and may well lead to a better life for both you and your children.”6
Even if your retirement portfolio is up and running, you might be missing an opportunity to save money on taxes and fees. That amount of money could make a big impact on a cause you care about. We’d love to sit down with you and go over your financial goals, so we offer a free, no-strings-attached Financial Plan Checkup to uncover any hidden taxes and fees. Give us a call to get your Financial Plan Checkup on the books and make sure you’re covered from every angle.
1 Better Business Bureau. 2022. “BBB Standars for Charity Accountability.” https://give.org/donor-landing-page/bbb-standards-for-charity-accountability. Accessed 5/12/22.
2 William P. Barrett. Forbes. “How To Use The Forbes List Of Top Charities To Guide Your Own Giving.” https://www.forbes.com/sites/williampbarrett/2021/12/16/how-to-use-the-forbes-list-of-top-charities-to-guide-your-own-giving/?sh=585cf5361cba. Accessed 5/12/22.
3 Better Business Bureau. 2022. “BBB Standars for Charity Accountability.” https://give.org/donor-landing-page/bbb-standards-for-charity-accountability. Accessed 5/12/22.
4 William P. Barrett. Forbes. “How To Use The Forbes List Of Top Charities To Guide Your Own Giving.” https://www.forbes.com/sites/williampbarrett/2021/12/16/how-to-use-the-forbes-list-of-top-charities-to-guide-your-own-giving/?sh=585cf5361cba. Accessed 5/12/22.
5 IRS. March 16, 2022. “Retirement Plan and IRA Required Minimum Distributions FAQs.” https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions. Accessed 5/12/22.
6 Nicolas Vega. CNBC. June 23, 2021. “Warren Buffet is ‘halfway’ through giving away his massive fortune.” https://www.cnbc.com/2021/06/23/why-warren-buffett-isnt-leaving-his-100-billion-dollar-fortune-to-his-kids.html#:~:text=Buffett%20calls%20his%20philanthropy%20%E2%80%9Cthe,money%3B%20I%20don’t.&text=%E2%80%9COver%20many%20decades%20I%20have,to%20do%2C%E2%80%9D%20he%20said. Accessed 5/12/22.