Spending

Charitable giving is 'an investment in your community,' says FTC fraud lawyer: Research it 'like a stock'

"Determine what causes are important to you and ask yourself some fundamental questions before embarking on giving."

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The events of last year were unprecedented in many ways, including, hearteningly, in the amount Americans gave to charity: a record $471.44 billion, according to the Giving USA Foundation. It's easy to see why folks were in the mood to chip in, given the effects of the pandemic.

Many Americans are still recovering this year, and as you approach the season of giving, you may be considering donating to the causes that are most important to you. But that can be easier said than done, says Fred Kaynor, managing director of business development and marketing at Schwab Charitable. "Many people have causes, but may not know the best charity that delivers what they're looking for in the best way."

In order to find the most effective nonprofit, experts say, you'll have to do some research — especially if you're receiving a host of holiday-season solicitations, says Tracy Thorleifson, an attorney with the Federal Trade Commission. "People need to realize that when they're giving a donation, they're investing in their community the same way they'd invest in a stock or a bond," she says. "You wouldn't just give money to the first stockbroker who approached you. You'd do your research first."

Beware of scams and 'soundalike' charities

If you're receiving come-ons from charitable organizations, you may run into some outright scams, says Thorleifson. "A Facebook post may contain a link that funnels your donation directly into an offshore account, or you may receive a telemarketing call from someone impersonating a charity," she says. "But frankly, I don't think there are many of those out there."

More often, you could find yourself considering donating to what she calls "soundalike" charities. These are legitimate nonprofit organizations with 501(c)(3) status, which means that you will qualify for a deduction on your taxes when you donate. But the money may not be used the way you think. "In the last big fundraising fraud case we settled, fundraisers represented that the money would go toward helping low-income women get mammograms and housing homeless veterans," she says. "In fact, they spent two pennies of every dollar on these programs."

Be particularly careful of organizations that purport to raise money for very popular causes, such as veterans, police, firefighters, breast cancer, and autism, Thorleifson says.

How to research charities and nonprofits

If you're considering an organization for a potential donation, start by entering its name into a search engine along with red-flag words like "fraud" or "scam," suggests Thorleifson. You can also use a charity watchdog site, such as Charity Navigator, which assigns ratings to more than 195,000 charities, or Give.org, run by the Better Business Bureau's Wise Giving Alliance. "Most of these will offer curated lists of pre-vetted charities they have checked out and that have met their standards," she adds.

Giving in the most effective way amounts to more than determining if certain organizations are on the up-and-up, suggests Kaynor. "If you're new to philanthropy or want to take a fresh approach, push aside solicitations," he says. "You need to evaluate what you're hoping to achieve with donations, determine what causes are important to you, and ask yourself some fundamental questions before embarking on giving to charities."

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He recommends a four-step process to finding the best donation for you.

1. Pinpoint your priorities

Think about the causes that are most important to you, and how you want to go about contributing to them. "Say you have someone in your family with breast cancer, so that's important to you," says Kaynor. "Is there a particular region you're associated with? Maybe a relative got great treatment at a hospital in Detroit. Can I combine my financial support with volunteering my services? Can I involve my family? The first step is pinpointing those priorities individually and holistically."

2. Identify charities with maximum impact on your cause

Look through various organizations' literature to determine which are having the greatest impact on the cause you're passionate about. "This will take some legwork," Kaynor says. "Find out if this organization operates in an efficient way. Does it deliver services that are important to you? This could be a good time to tap into your networks or work with a charitable advisor."

3. Understand the approach the charity takes

Generally, Kaynor says, charitable work involves performing services, promoting knowledge, providing advocacy, or building movements. A charity may employ a combination of these tactics, but understanding the primary functions of the organization you're donating to can help you align yourself with an organization whose work you admire.

4. Vet your short list

Once you've got things narrowed down to a few candidates, delve into the organizations' websites and make sure you're donating to a functioning, effective organization, Kaynor says — one that has experience in its field, a clearly outlined strategy, and a track record of measurable impact on the cause that you're hoping to address.

"That all may sound a little formulaic," Kaynor says. "But as we've seen giving grow over the past few years, having this rigor has allowed people to have an even bigger impact."

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