JUST BEFORE Thanksgiving in 2017, a heartwarming story hit the news. A young woman from Philadelphia named Katelyn McClure had run out of gas on the highway and found herself stranded. By chance, a homeless veteran named Johnny Bobbitt was nearby and, in an act of selflessness, he gave McClure his last $20 to buy gas.
After making it home safely, McClure wanted to express her gratitude, so she set up a GoFundMe page to help Bobbitt get back on his feet. The story spread quickly online and the pair drew national attention. Good Morning America called Bobbitt a “Good Samaritan” and hailed McClure for her “honorable deed.” In response to the publicity, thousands contributed through GoFundMe, raising an incredible $400,000 for Bobbitt.
It was a wonderful story. The only problem: It was a complete fraud. McClure spent most of the funds on herself, buying a BMW and gambling in Atlantic City, with Bobbitt receiving relatively little. Both ended up pleading guilty.
To be sure, these sorts of things are rare. But they serve as a reminder to be cautious when making charitable contributions. Before writing a check, here are eight steps you should take to vet an organization:
1. Status. If you don’t have prior experience with an organization, your first question should always be: Is this an actual charity? A good starting point to sniff out fraud is the IRS’s Tax Exempt Organization Search tool, which will tell you if an organization is a registered nonprofit. Note that donations to political candidates, political parties and lobbying organizations are not tax-deductible, so they won’t appear in the database.
2. Structure. Many charities are structured as feeder organizations, collecting donations and then distributing them to other charities. While there’s nothing wrong with this per se, it does add a layer of overhead expenses, leaving less for actual charitable work. Ask yourself whether this is the most efficient way to support the causes you care about.
3. Use of funds. In general, when charities raise money, they use it in one of three ways: to support operations, fund a capital project—such as a new building—or add to their endowment. Each has its merits. Still, when you make a gift, think about how the organization will be using it. If your gift is large enough, keep in mind that you can attach restrictions.
4. Financial health. Is the organization on a solid financial footing? If you aren’t sure, check its tax return, called a Form 990. These are available publicly. You can find them in a variety of places online, including FoundationCenter.org. Alternatively, if you use a donor-advised fund, such as the one run by Fidelity Investments, it may provide access to 990s.
Religious institutions are exempt from filing 990s. In lieu of that, they should provide some sort of financial report. If an organization doesn’t offer any kind of financial disclosure, I see that as a deal breaker. I wouldn’t support an organization that refuses to tell donors how its money is being used.
5. Efficiency. Assuming you’re able to access a financial report, examine how the organization spends its money. In particular, see how much is spent on marketing and executive salaries vs. actual on-the-ground charitable work. A Form 990 won’t tell you everything, but it does include executive salaries, which is often a good indicator of the organization’s fiscal habits.
6. Financial trends. What has been the trend in revenue and expenses? Are contributions growing or shrinking? On the expense side, are expenses growing more slowly or more quickly than revenue? While the numbers may not tell you everything, you could use them as a basis for asking questions of the charity’s staff.
7. Governance. In addition to scrutinizing top executives’ salaries, look closely at their qualifications. Who runs the organization and how long have they been in place? What has been the trend in revenue and expenses under their leadership compared to prior administrations?
8. Fair dealing. I used to participate in an annual charitable event—until I discovered on its Form 990 that the organization was paying out a seven-figure sum for “management expenses” to a family-owned firm. Was there anything improper going on? Maybe not, but it’s impossible to know. When charitable dollars are involved, I think it’s reasonable to insist on absolute transparency.
Adam M. Grossman’s previous articles include Stepping Out, Math vs. Emotion and Don’t Bank on It. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.