Giving with Strings Attached

Editor's note: This article was updated on July 3.

A donation to your favorite charity is more than a gift or a tax break -- it's an investment. Pick an inefficient charity and your contribution will be eaten by administrative costs and fund-raising expenses. You can attach strings to your gifts, but a targeted gift that misses the mark (or is diverted) will cause you financial grief.

You don't want to end up in a dispute like Bill Robertson's, either. The 58-year-old Naples, Fla., man and his family, heirs to the A&P supermarket fortune, have locked horns in a nearly six-year-long battle with Princeton University that still awaits trial. His parents, the late Charles and Marie Robertson, gave the university $35 million in A&P stock in 1961 to train graduate students to serve as U.S. diplomats. Now the gift has grown to about $880 million and the family claims that Princeton has funneled away millions to support other projects. The dispute, say Princeton officials, boils down to who controls the foundation established to administer the gift.

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Although the Princeton case is the largest of its kind, other nonprofit organizations have struggled to account for how donations designated for special purposes are spent. Last year, audits at the University of Colorado Foundation and the University of Wisconsin-Madison found that those organizations poorly tracked the use of restricted gifts. The American Red Cross is investigating more than 7,100 cases of potential fraud in hurricane relief efforts last year. Detroit public radio station WDET, which changed its format from music to news and talk shows, dodged a lawsuit from donors who had given money to support music programming.

Americans gave about $260 billion to charity last year, a 6% increase over 2004 donations, according to the Center on Philanthropy at Indiana University. That's a lot of money, especially when you consider that cynicism among givers runs high.

A Brookings Institution survey found that only 14% of donors think charities do a good job of spending their money wisely. "The era of assumed virtue is over," says Robert Ottenhoff, president and chief executive officer of GuideStar, which monitors the activities and finances of more than 1.5 million nonprofit groups.

Bang for your buck

The important lesson from these horror stories is to look before you give. Examine a charity's finances -- its annual report, audited financial statement and Form 990 (a tax record filed with the Internal Revenue Service). Note that many religious organizations are exempt from filing with the IRS, but reputable charities will gladly provide you with audited financial information. If they don't, give elsewhere. You can find charity ratings and financial information on the Internet.

A charity should keep administrative and fund-raising expenses to less than 25% of its budget. "Most good charities are well below that number," says Trent Stamp, executive director of Charity Navigator, an independent watchdog. The Red Cross spends less than 9% of its total budget on administration and fund-raising. In contrast, the Americans for Prosperity Foundation, which aims to educate the public about economic policy, spends 46% of its total budget on those expenses. If a charity you want to support spends more than 25 cents on the dollar for administration and fund-raising, you need to find out why.

Overhead varies based on the type of charity. For example, the Children's Museum of Pittsburgh spends 16% of its budget on administration, while the Food Bank of Corpus Christi, Tex., uses only 2% of its budget to cover costs. Both organizations have the highest rating -- four stars -- from Charity Navigator because a museum is more costly to run than a soup kitchen. To establish a frame of reference, compare your charity with others like it. Keep in mind that ratings are usually based on the charity's financial statements, which can tell you how efficiently the organization operates but not how effectively it carries out its mission.

Monitor the charity's finances carefully because the organization could go bust. For example, the Foundation for New Era Philanthropy went bankrupt in 1995, but not before it took in more than $354 million from donors and hundreds of nonprofit organizations.

And when it comes to giving money, avoid donating over the phone. Nine out of ten times, the phone solicitor is a for-profit telemarketer who is working on behalf of the nonprofit for a percentage of the take, Stamp says. The cut can range from 50 cents to 90 cents on the dollar.

Know the people

When a significant sum of money is involved, you need to look beyond financial statements and ratings. Talk with the organization's board members and volunteers. Ask for references from donors who have given to the charity in the past. If your questions aren't answered to your satisfaction, continue to ask until they are. Among the common concerns of givers: How does the charity plan to meet its financial demands? How does my donation fit into the charity's strategy? Has the charity ever returned a restricted gift?

Charities and nonprofits shouldn't take your money if they can't fulfill your requests. In 2002, Boston University returned a $3-million gift designated for a library renovation after the project stalled. Yale returned a $20-million gift in 1995 after the school failed to offer a course on Western civilization as specified by the donor.

Nonprofits prefer gifts they can use for any purpose. Gift restrictions can be burdensome for smaller organizations to track and report. If you don't want to hassle with restricting your donation, give to organizations that have narrowly focused missions. Once you donate, you usually have to trust the charity will keep its promises.

A lengthy relationship builds trust and makes it easier to believe that a charity will follow your wishes. Heidi Wagner Greenleaf raised $100,000 to establish a scholarship in her father's name at their alma mater, Franklin & Marshall College, in Lancaster, Pa. An active alumna since her 1984 graduation, Greenleaf worked with the school staff to craft the scholarship.

The art of the deal

If it's worth negotiating the terms of your gift, it's worth having a lawyer draft a written agreement. An unusual request will require a more detailed agreement than a common one. Caught up in the euphoria of making a gift, "a lot of people don't think about specific restrictions for their donation or an enforcement mechanism," says Ron Malone, a partner at Shartsis Friese, in San Francisco, who specializes in charity law.

Hash out the mission of your gift in the agreement, which should also list benchmarks for success and failure. If you're giving to a building campaign, address naming rights. If you're donating art to a museum, describe how that work should be stored and displayed. If you're contributing money or stock, set limits on how much of the gift an organization may spend each year. The agreement should specify what portion of a gift, if any, will cover administrative costs. Remember that the charity will decide any details left out of an agreement.

But make your agreement flexible. Case in point: Last year, the cash-strapped Barnes Foundation had to go to court to move its art collection to a downtown Philadelphia location, where the charity hopes to gain revenue from more visitors and benefit from the backing of new donors. Although the move violated a detailed agreement signed more than 80 years ago by the founding donor, Albert Barnes, the judge deemed the relocation vital to the charity's survival. Consider naming alternative ways to use your gift in case your requirements go unmet.

If your gift is large enough, asking for a separate fund can help prevent budget games, says Malone. If a restricted gift goes into the general fund, it's more difficult to tell if your donation actually increased the amount a charity spends on your cause.

After 9/11, for example, the Red Cross was criticized for plans to set aside money for future disasters rather than giving most of its donations to victims' families. As a result, the Red Cross now sends donors an acknowledgment that reconfirms their intent and the purposes for which their gifts will be used.

For large gifts, you can request a periodic report on the current value of your donation and how it has been used. But keep in mind that the more time and money a charity spends on administering your gift, the less it has to support its cause.

Where to find the numbers

Thanks to the Internet, you have plenty of ways to research whether charities are spending their money responsibly. Some nonprofit organizations, such as churches, hospitals and schools, are more difficult to examine online than other charities. Check with accrediting bodies, associations and state regulators before you make a donation.

Better Business Bureau Wise Giving Alliance offers free analysis of national charities on its Web site. It plans to cover 800 nonprofits by December, and the staff will examine a national charity if you request a review. It takes about six weeks to generate a report.

Charity Navigator rates more than 5,000 nonprofits on financial efficiency.

Evangelical Council for Financial Accountability provides information on more than 1,200 Christian charity groups.

GuideStar shows you recent nonprofit tax filings for free. The filings, like most tax forms, can be confusing for the uninitiated. For $30 a month (or $300 a year), GuideStar will provide more-comprehensive information.