Professional athletes often choose to give back to their communities in a number of ways. Some volunteer their time attending events while others may collect food, clothes, toys, or supplies for causes about which they are passionate. Many times, professional athletes choose to give back financially, realizing that cash is the most critical lifeline of most non-profit organizations. In these instances, they can choose a variety of methods of giving. Some give directly to their favorite organizations while others form their own organization whose mission is to provide aid to others. We typically think of the latter as a foundation.
There are two types of foundations that vary in structure and have unique rules, but the IRS distinguishes between the two by stating the following:
- Private foundations typically have a single major source of funding and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.
- Public foundations have an active program of fundraising and receive contributions from many sources, including the general public. They also actively function in a supporting relationship to one or more existing public charities while receiving income from the conduct of activities in furtherance of the organization’s exempt purposes.
Historically, professional athletes have set up both types of foundations but many are trending away from this method of giving.
Requirements for Starting a Foundation
What most people fail to realize when running a foundation is that it is actually like operating a business. Before the foundation can cut a check to any charity or program, the organizer must handle the business matters.
These matters include a lot of legal tasks like forming a corporation, drafting Articles of Incorporation, selecting board members and developing rules or by-laws for the foundation to follow, meeting regularly and documenting the specifics of those meetings. After incorporating, a tax identification number is required in order to apply for tax-exemption status with the IRS. If approved for tax-exempt status, rules set forth by the IRS must be followed to maintain it. Even with tax-exempt status, annual tax filings must be prepared and tax receipts must be sent to each donor.
In addition to the legal and tax matters, someone may need to be hired to run the foundation at a reasonable salary while keeping in mind any conflicts of interest that could occur in the day-to-day administration. Marketing and fundraising may be necessary as well to ensure that the foundation is able to accomplish its intended goals.
Once all the business is taken care of, then the foundation can start to give back.
That may sound like a lot of work but that is what it takes to start a foundation. Failure to execute properly on these task could result in punishment causing the foundation to lose its tax-exempt status or even result in legal troubles.
There have been many professional athletes who’ve had to deal with a host of problems because their foundations were mismanaged or lacked proper oversight. In some cases, these athletes were committing crimes without even knowing it. According to ESPN, 74% of athletes’ foundations failed to meet acceptable non-profit operating standards in 2013.1
The consequences for many can be extremely costly, affect your reputation, and even result in jail time. There are countless of examples of foundations set up by athletes that have failed over the years, but below is a list of a few that failed in recent years:
- Former New York Yankees third baseman, Alex Rodriguez, had two foundations, neither of which had filed a tax return for seven years, prompting the IRS to revoke their tax-exempt statuses.1
- The charity founded by former NFL linebacker, J.T. Thomas, suspended operations when it became too overwhelming for his mother to run.2
- Former Chicago Bears player, Chris Zorich, was ordered to pay back almost $350,000 in unspent funds that he couldn't account for after his charity fell into disarray. He also pleaded guilty to federal misdemeanor charges for not filing personal income tax returns.2
- Former NBA player, Kermit Washington, was sentenced to six years in federal prison for spending hundreds of thousands of dollars in charity donations on vacations, shopping sprees and plastic surgery for his girlfriend. He was also ordered to pay nearly $970,000 in restitution after pleading guilty in to making a false statement in a tax return and aggravated identity theft.3
As a result, many athletes are taking a different approach when it comes to charitable giving. One alternative to a foundation, and what a lot of professional athletes are gravitating toward, is a Donor-Advised Fund (DAF). A DAF can accomplish the same end goal as a foundation with a lot less work or stress. A DAF is an account administered by a third party sponsor, such as a community foundation, who handles all the business and legal matters mentioned above, freeing the donor from those responsibilities. It allows inclined individuals, families and businesses to make an irrevocable gift and take an immediate tax deduction which satisfies one of the criteria for charitable giving. With those contributions, the sponsor typically invest the funds until they are directed to make a distribution by the donor to a charity of the donor’s choosing, satisfying the other important criterion.
Setting up a DAF can be as simple as setting up an investment account. The donor completes an application, contributes funds, and directs the funds when they wish. The general public can also contribute to a DAF making it easier for donors to reach fundraising goals while also promoting a cause that interests them. Donors need only report their gifts on their personal tax returns so no additional work is required there.
The simplicity of a DAF highlighted here is just one of the many benefits that professional athletes prefer when comparing charitable giving options.
Here to Help
Charitable endeavors not only promote social good, they also may provide financial benefit to those on the receiving end as well as those who give. However, if not properly organized and managed, donors may find themselves in deep financial or legal troubles. If you feel that a donor-advised fund is right for you or want to discuss other options, please give us a call.
Reggie D. Ford, CPA is the Founder and President of Rosecrete Wealth Management. Rosecrete provides personalized, comprehensive financial services to affluent and high net worth clients. Rosecrete focuses on sports, legal, and medical industries with a passion for helping younger generations with early retirement planning.
For a list of states in which I am registered to conduct securities business, visit my website at www.rosecrete.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing includes risk including potential loss of principal.
Rosecrete Wealth Management and LPL Financial does not provide legal or tax advice. Please consult your legal or tax advisor regarding your specific situation.