Providing Charitable Assistance to Survivors of a Disaster

“Providing Charitable Assistance to Survivors of a Disaster,” that is the subject of today’s ACTEC Trust and Estate Talk.

This is ACTEC Fellow Chang Chae of Los Angeles, California.

Nothing is certain except death, taxes, and disasters. Although we can’t predict when disaster will strike, thoughtful planning can help individuals, families, and communities prepare, respond, and recover. In last week’s episode, Disaster Preparedness for Trust and Estate Planning, we discussed steps families can take before disaster occurs. Today, we’re continuing that conversation by focusing on what comes next. When the unthinkable happens, charitable organizations and community support often play a critical role in helping survivors rebuild their lives.

ACTEC Fellow Sue Abbott of Boston, Massachusetts, will discuss some of the many ways charitable resources can be directed to disaster relief victims. She will explore working with existing charities and community foundations, as well as creating new charitable entities designed specifically to assist disaster survivors. Welcome, Sue.

Sue Abbott:  Thank you, Chang. Today, I’m going to talk about how we as attorneys may be able to help with efforts to provide charitable assistance to survivors of a disaster. I’ll focus, in particular, on advising charitable organizations that are operating in this space.

What Happens After a Disaster: The Role of Charitable Assistance

Before I begin, I want to point out that the ACTEC Foundation recently put together a detailed handbook as a resource for attorneys who are asked to assist in the aftermath of a disaster. That handbook is available on the ACTEC Foundation website. In addition to going into more detail on the topics discussed today, it also looks at how individual clients may be able to make charitable or private gifts, including through crowdfunding platforms, and ways in which employers may be able to provide charitable aid to employees who are disaster survivors.

Advising Charitable Organizations on Disaster Relief

But, today, we’ll focus on advising charitable organizations. When considering options for the provision of aid by a charitable organization to survivors of a disaster, in most cases, it will be best to work through an existing charity, leveraging the charity’s experience and resources. Community foundations, in particular, may be uniquely positioned to assist.

In advising an existing charity, there are a few points to consider. First, the charity’s mission must encompass the disaster relief that is envisioned. If it does not, its organizational documents may need to be amended. If disaster relief is a new activity for the charity, it will need to report the activity on its next Form 990 filed with the IRS. And, of course, the provision of relief must meet the 501(c)(3) requirements as they’re applied in the context of disaster relief. I’ll talk about that in more detail in a few minutes.

Why Working with Existing Charities Is Often the Best Approach

A variation on the theme of working with an existing charity is the use of a fiscal sponsorship structure. A fiscal sponsorship is a way of allowing a project to attract and receive charitable funding without having to create a new charity. The existing charity – the “fiscal sponsor” – accepts donations and makes the funds available to the project to be used for charitable purposes. There are several ways of structuring a fiscal sponsorship, and care needs to be taken to ensure it is structured properly. The project can operate either as a direct program of the fiscal sponsor or as a separate legal entity to which the fiscal sponsor makes grants that have the correct guardrails in place to ensure they are restricted to use for charitable purposes.

The fiscal sponsor must retain discretion over use of the funds that are donated to it. The project must fall within the mission of the fiscal sponsor, and there should be a written agreement governing the fiscal sponsorship. A fiscal sponsorship can sometimes be a good option in the disaster relief context where needs are immediate and a project may be limited in duration. However, if for some reason working through an existing charity or a fiscal sponsor is not a viable option, organizers of relief efforts may wish to create a new charity.

When to Create a New Disaster Relief Charity

Of course, any new charity must meet the general 501(c)(3) requirements applicable to all charities: it must have an exempt purpose, there must be no private inurement, and there will be limitations on its ability to engage in certain political activity. It will be classified as either a public charity or a private foundation. Depending on the type of relief efforts it will engage in and the sources of funding it wishes to attract, it may be important for the 501(c)(3) to qualify as a public charity. In order to do so, it will need to either meet the public support test or qualify as a supporting organization to another public charity. In many cases, meeting the public support test won’t be a problem if the organization expects to attract broad public funding.

Key 501(c)(3) Requirements for Disaster Relief Organizations

One of the big issues for any new charity will be timing. It will probably need to request expedited approval of its Form 1023, the application for 501(c)(3) status, and it will need to be aware that even expedited approval will likely take weeks. IRS Publication 3833 has some examples and explanation of how the expedited approval process might work in the disaster relief context. In addition, any new charity will need to comply with requirements specific to the disaster relief context. These rules also apply to existing charities providing disaster relief.

The first issue is whether the provision of disaster relief is a charitable purpose for purposes of Section 501(c)(3). A 501(c)(3) must be both organized and operated for one or more 501(c)(3) purposes. On the organizational side, the charity’s organizational documents must cover the planned assistance. On the operational side, the provision of aid to the needy and distressed is generally a charitable purpose. In the immediate aftermath of a disaster, the provision of food, shelter, and the like will almost certainly be considered a valid charitable purpose.

Expedited IRS Approval and Form 1023 Considerations

In the longer term, however, continued provision of aid may require financial needs testing. While there is some authority indicating that “need” does not always have to mean financial need, the IRS takes the position in Publication 3833 that disaster victims are not automatically eligible for all forms of charitable assistance simply by virtue of surviving a disaster, and that charitable organizations providing aid generally must show that distributions are made based on demonstrated financial need. This is particularly true in cases involving the provision of financial assistance to survivors.

Publication 3833 directs charities to establish financial needs assessment procedures and to keep records showing: the process for selecting aid recipients, the objective criteria that are used for dispersing aid, the needs and resources of each recipient, the types and amount of aid given to individuals and their identities, and the composition of any committee awarding the aid. Charities lacking the infrastructure to engage in this type of “needs” testing may wish to consider granting funds to other charities that do have that ability.

Financial Need Requirements and Compliance in Disaster Relief

In addition to ensuring that proposed relief complies with charitable purpose requirements, another concern in connection with the provision of relief by a 501(c)(3) has to do with the charitable class requirements. For any charitable activity, the group of individuals served must be sufficiently large and indefinite to qualify as a charitable class. This requirement can be difficult to satisfy in the disaster relief context, particularly for a new organization formed specifically to benefit survivors of a particular disaster, and particularly if the group of impacted individuals is relatively small.

It may be possible to remedy concerns regarding a small charitable class by expanding the class to include victims of future disasters.  But, if so, this language should not only be included in the charity’s organizational documents, the charity should actually operate with this in mind. And, of course, as is always the case, donations to a disaster relief charity cannot be earmarked by a donor to a particular individual or family.

If a charity will not meet all of these charitable purpose and charitable class requirements, another alternative in the right circumstances is to structure the charity so that it meets the 501(c)(3) requirements by virtue of lessening the burdens of government. This is the approach we took in creating the One Fund Boston to assist the survivors of the Boston Marathon bombings in 2013.

Typically, a charity seeking 501(c)(3) status on the basis that it lessens the burdens of government must satisfy a two-part test: Does a governmental unit consider the activity to be its burden, and do the charity’s activities actually lessen that burden? In the case of the One Fund Boston, there were a variety of factors that allowed qualification under a “lessening the burdens of government” standard. These are discussed in more detail in the ACTEC Foundation Handbook. There were some fairly unique circumstances involved in that particular case, and this approach will not work in all situations.  But it is an option where there is significant governmental involvement.

That is a quick overview of the legal framework for charitable organizations providing aid to the survivors of a disaster. I hope it is helpful to you if you are ever asked to advise charitable organizations in your community in the wake of a disaster.

Chang Chae: Thank you, Sue, for an enlightening and helpful talk in this needy, but hopefully not too common, area.

You may also be interested in:

Disaster Preparedness for Trust and Estate Planning Disaster preparedness for estate planning: key tips on insurance, recovery, and client guidance from ACTEC Fellows.

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