Originally published in Philanthropy News Digest.
Trust-based philanthropy (TBP) gained popularity during the pandemic as nonprofits needed to respond quickly to changing needs. It has taken on many names over the years as the concept grew in popularity, but TBP lessens the burden on nonprofit grantees and creates a more equitable power dynamic between grantors and grantees.
Rather than giving all power to the funder’s priorities, TBP allows nonprofits to spend funds where they would most benefit. This may allow a nonprofit to shore up its general operating budget to allow for better long-term planning, or it may allow the nonprofit to respond to an immediate need. Under TBP, smaller nonprofits that may not have the administrative capacity required under traditional grantmaking are able to apply for and receive grants to further their mission.
Despite the growing popularity of trust-based philanthropy, there is still confusion about how it is implemented, since there are many technical considerations to consider.
UPDATE PROCESSES TO MEET NEEDS
A lot of confusion around the implementation of trust-based philanthropy arises from the fact that it changes the giving model for many private foundations.
Multi-year unrestricted grants are common for TBP. If the foundation is not used to having multi-year grants, they need to ensure they are tracking their future commitments for budgeting, cash flow and minimum distributions, as required by tax regulations.
The trust in TBP is largely built on rigorous due diligence, though this work is framed as part of a deep relationship. Instead of an investigation that relies on submitted information from a nonprofit, due diligence should be approached holistically to understand the potential grantee’s leadership, programs and finances. This transfers the burden of diligence to the grantor.
Funders should pay special attention to financial statements, which will offer insights into the overall business model, deficits or surpluses, as well as how the organization is sustaining its work and who else is in its funding portfolio.
This information should help private foundations understand how the organization would benefit from grant funding.
DOCUMENT EVERYTHING
A tenet of TBP is reducing unnecessary paperwork. The idea behind this is to streamline processes and dismantle structural barriers that may prevent a nonprofit from fulfilling its needs due to the administrative burden.
But this does not mean reducing documentation. As auditors, we review grant agreements and have seen the importance of keeping up-to-date policies and procedures. As foundations adopt a more relational approach, they should keep detailed notes to ensure no information is lost in the process. However, as previously mentioned, the burden of documentation falls on the grantor to maintain instead of the grantee to provide.
It is important to develop concrete policies and procedures around TBP and ensure team members keep these policies in mind. As they are rewritten, policies and procedures should still follow the foundation’s original mission and intentions.
Grant agreements should also be rewritten to ensure they embrace TBP principles while remaining in line with the foundation’s policies and procedures. If this is the foundation’s first foray into multi-year grants, make sure that the accounting staff understands the terms of the agreements and account for the grants in the proper accounting period.
BUILD TRUST IN ALL DIRECTIONS
At its core, trust-based philanthropy is based on the idea that nonprofits’ needs evolve as community needs change. TBP goes beyond adopting a program and finding success and focuses on fostering a strong ongoing relationship.
Foundations should remember that trust must be cultivated and maintained, and a trust-based model should undergo continuous improvement. Communication with grantees should remain open with regular touchpoints to ensure both parties are happy with the relationship, with non-monetary support offered in addition to funding to empower the grantee for success.
In the same way that grantees are trusted to spend funds how they see fit, grantors should also be trusted to solicit feedback, stay open-minded and consider adjusting processes.
TBP is based on a strong relationship between the grantor and grantee, yet private foundations have other stakeholders to consider outside of a specific grant transaction. Do not forget about board members, legal experts, auditors, tax team and other advisors.
When making the switch to TBP, keep all stakeholders in the loop. Documentation can help with this step, since getting all new information down on paper will help as information is disseminated.
Proponents of trust-based philanthropy believe that this movement builds a more just and equitable society. Although it takes away administrative barriers for the grantee, it does not eliminate the need for administration and documentation. Rather, TBP builds accountability on both sides with equity in mind by sharing the burden and allowing grantees to do what they do best: serve the community.
ABOUT THE AUTHORS:
Stephanie Yan, CPA, has more than 20 years of nonprofit accounting experience and is the Private Foundation Practice Leader at GHJ, a national advisory and accounting firm. She works out of GHJ’s Los Angeles office.
Amber Coatney, CPA, has nine years of nonprofit accounting experience and is a manager in GHJ’s Audit and Assurance Practice with a specialty focus on nonprofits. She works out of GHJ’s San Jose office.
