Direct gifts to individuals (be they in the U.S. or abroad) will be considered taxable gifts, no matter how great the individuals’ need or how charitable the giver’s intentions. The same is true of gifts to foreign organizations that do not satisfy the requirements listed above. These gifts must be reported on a gift tax return, and any such gift (to the extent it exceeds the annual exclusion amount) will reduce your lifetime gift exclusion amount (currently $11,700,000 per person). This limitation may not be relevant to the average donor, but consider Mark Zuckerberg, the Chief Executive Officer of Facebook. Zuckerberg donated over $990 million to the Silicon Valley Community Foundation. If this gift would have been made to foreign individuals or foreign charities that did not qualify for a gift tax deduction, he would have had to pay an additional $390 million in gift tax to pay for his good deeds.
The estate tax rules relating to bequests to foreign charities and individuals generally parallel the gift tax rules.
U.S. charities that give internationally
If there are specific foreign causes or organizations you would like to support, the simplest option is to give to a “friends of” organization as described above. Alternatively, you can work with a U.S. organization that specializes in international gifts. Some examples of U.S. organizations that focus on global giving include:
Charitable donors are sometimes concerned about the high transactional costs associated with giving to U.S. organizations that “take a cut” before transferring the donations to the place of need. However, depending on the charity, the fee can be relatively low, and using such a U.S. organization provides clearly defined tax benefits and offers protection against the anti-terrorism rules discussed below. Donor advised funds can often be created at these organizations.
Some donors who would like to skip the middleman and give directly to foreign charities may choose to create and donate to a private foundation (claiming the income tax deductions described above) and then have the foundation make donations abroad. Generally, direct grants by a private foundation to foreign recipients are permissible and will count toward a private foundation’s minimum distribution rules, as long as the foreign grantee qualifies as the equivalent of a public charity, or the private foundation exercises expenditure responsibility over the funds. This option allows a donor to have much more control over the distributions, but private foundations must abide by significant and ongoing operational and reporting requirements.
In addition to the tax issues described above, U.S. persons are prohibited from engaging in financial transactions with foreign persons who commit, threaten to commit, or support terrorism. This includes humanitarian assistance to such persons or to charities abroad with which they are affiliated. The Treasury Department has compiled a list of embargoed individuals, groups and entities. The consequences for violations, even unknowing violations, can be significant, including civil and criminal penalties. Individual donors, “friends of” organizations, international charities, and private foundations engaged in overseas charitable giving would be wise to know and follow these rules.
Amid compelling causes around the world and convenient channels to donate, U.S. taxpayers should take note that international charitable giving in many instances has significant and different tax implications as compared to giving to local causes. Some thoughtful planning — together with a legal or tax advisor when needed — can help prevent unexpected taxes related to your international charitable gift.
For additional “Wealth with Withers” columns, see:
‘Considerations for Californians looking to move out of state,’ by Michelle Graham and Vivienne King
‘Preparing for sunset: What lawyers need to know about the gift and estate tax,’ by Elizabeth Bawden
‘Protecting trustees from blame (and liability) in COVID-19’s new world order,’ by Michael Brophy and Craig Weinstein
‘California’s Proposition 19: 9 considerations before the November 3 vote,’ by Yin Ho