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Don't Donate to charity in the Dark - Charity Article

As a charitable donor, you face a dilemma. When it comes to helping others, you have the best of intentions. You want to do good deeds, and having been successful in your own life, you're willing to make a personal sacrifice for the greater good. You know that the vast majority of charities do the best they can with the financial and labor resources they have, and so you feel relatively confident that good things will result from your donation.

On the other hand, you're not naive. You're probably aware of various scandals involving charities and misappropriation of funds and other fraudulent behavior. While you may not be on a crusade to root out corruption in the nonprofit sector, you definitely don't want to waste your money on a bad organization that won't get the job done.

Luckily, there are a number of ways you can keep tabs on your favorite charity. Without too much effort, you can easily get a great deal of vital information about a charity's operations and finances. However, if you really want to make a difference in your community, you can dig even deeper not only to uncover the inner workings of your favorite charity, but also to play an active role in helping it achieve its goals.

Charities and public information
Thanks to the Internet, a great deal of information is available from your home computer. Checking to see whether an organization actually qualifies as a charity is as easy as taking a look at IRS Publication 78. Once you've confirmed your charity's status, you can get a great deal of information from looking at the annual information return it must file with the IRS every year. Form 990 includes data on how a charity receives and spends money, with details on its highest-paid employees and outside contractors for services, as well as a breakdown of expenses that can tell you how much of your money is spent for charitable purposes versus administrative and operating expenses.

As fellow Fool Mary Dalrymple discusses, there are a number of ways to get this information. Whether it's through an outside website like GuideStar or by contacting the charity directly, you can get the information you need.

Getting inside your charity
The information you can get from public sources is probably sufficient for typical donors who are satisfied with writing a modest check to a charity's general fund. However, if you're planning to make a large donation and want to take a more active role in how your money will be spent, there's no substitute for rolling up your sleeves and becoming familiar with the inner workings of your charity.

You should expect your expression of interest in a charity to be well-received by the organization's directors and staff. In the non-profit world, money is a precious commodity, and charities know that they have to do as much as they can to raise much-needed funds for their operations. Yet you'll also find that most of the people who work for charities have a firm belief in the mission behind what they're doing. Many charitable employees could choose to work in the private sector and receive much better salaries and benefits, but they choose to dedicate their careers to doing work that lets them give back to their communities. They'll usually be pleased at your desire to know more about what they do.

At the same time, seeing your charity from the inside gives you a valuable perspective on its future. While most publicly available information focuses on the past, seeing your charity's strategic plans for the coming years will give you a much better idea of how viable your charity is and what it will take for it to be successful far into the future.

For example, during the late 1990s, the boom in the stock market led to a significant rise in donations. Investors sitting on large gains in their stock portfolio made charitable gifts of stock to reduce their capital gains taxes. As a consequence, many charities started to make ambitious plans under the assumption that these higher donation levels would be permanent. Unfortunately, when the stock market fell sharply, many of these new donors were unable to continue supporting their charities. In addition, since many charities had endowments that had significant stock holdings, they were also faced with portfolio losses that hindered their ability to use endowment funds to support their operational budgets. Those charities that had failed to plan for this downturn faced crises that forced many of them to close their doors permanently and led others to take drastic action, such as liquidating endowments that had originally been slated for long-term support.

By taking an active role in your charity, you can help it avoid calamities like these. For instance, if you see that the charity's directors and staff have an overly optimistic view of the sustainability of increased donations or investment gains in its endowment fund, you can use your knowledge of financial affairs to persuade them to be more conservative in planning for the future. You can act as a representative of the many donors who want the charity to act in a fiscally responsible manner with their donations, and you can make it clear that your continuing support is contingent on the charity's ability to manage its operations in the most efficient way possible. At the same time, as an active participant, you'll gain insight into the mechanics of how a charity gets work done, which may change your views about how necessary certain administrative expenses are to the efficient running of the charity.

With the information and tools available to help you, you can go beyond just writing a donation check. By taking a close look at your favorite charity and understanding how it operates, you can use your knowledge and experience to benefit the charity not just financially, but also by improving its strategic outlook. Your efforts could be the crucial element in ensuring the continuing success of your favorite charity well into the future.

By Dan Caplinger
December 7, 2006

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