Imagine having your name etched in stone into one of the most iconic public landmarks in New York City. That’s what happened to Wall Street financier Stephen A. Schwarzman after he donated $100 million to the expansion of the lion-guarded N.Y. Public Library. And more philanthropists are getting in on the increasingly popular strategy to prominently display their family name on a public landmark or building. That’s because charitable individuals and families are utilizing naming rights in connection with a donation. It’s a way for them to honor a loved one, establish a family legacy, enhance their personal brand, or in the case of Mr. Schwarzman, strengthen ties to a community they care about.
But how are they doing this? We asked Jeffrey Haskell, our chief legal officer at Foundation Source, to share how donating through a private foundation – instead of giving directly to the organization – offers significant advantages and what should be included in these types of agreements.
Why Donate Through a Private Foundation?
While it may seem like donating directly to the organization is the best option, there are naming rights advantages when giving through a private foundation. Many donors use their foundations to help ensure that there’s a party to the naming rights agreement that will endure beyond the donor’s death. In many areas, heirs can be denied the right to enforce naming rights agreements entered into by individuals. A private foundation, however, can endure indefinitely, ensuring that there is a party in existence to monitor the grantee’s compliance with the agreement.And if a breach occurs, it’s much easier to negotiate for return of funds when the donor is a private foundation versus an individual.
Tax Benefits & Considerations
There may be private foundation tax benefits. For example, if the grantee is not a U.S. charity, the donor will almost certainly be better off using a foundation since an individual generally cannot get a tax deduction for a gift to a non-U.S. charity. While donors are generally not allowed to personally profit from their private foundations, the tax rules mainly treat public recognition, including naming rights, as a benefit that is “merely incidental” to the charitable purposes served by the foundation’s gift. Perhaps, because it recognizes that public charities generate a lot of revenue from facilitating naming gifts, the IRS has generally blessed the use of foundations to make grants in exchange for naming rights. This does not mean that there is no risk, and much may depend on how the distribution is framed. However, if done correctly with acarefully drafted agreement, using a private foundation to secure naming rights has a long-accepted track record of success, and generally does not present tax risks.
8 Tips for an Effective Naming Rights Agreement:
The written gift agreement should address many or all of the following:
- Parties to the agreement. Usually these will be the foundation making the grant and the charity receiving it.
- Amount and timing of the grant. Some grants will be made in a lump sum. In other situations, grant installments may be more desirable and might be conditioned on meeting certain milestones.
- The name and its appearance. The donor will want to specify how the name will read. It can be very specific, such as requiring a certain font and size. There’s no need to mention the foundation unless desired.
- To what the name attaches. Charities will want flexibility to offer other naming opportunities in and around the named space. The agreement should be clear on the extent to which these other opportunities will be offered and ensure that no other naming opportunity will be given more prominent treatment.
- Destruction. What happens if the named space is destroyed and not rebuilt during the term of the naming right? Can the name be transferred to another space? If it’s important to the donor, it should all be specified.
- Publicity. What are the rules here? Must all publicity of the space use the space’s full name? Will the foundation have the right to pre-approve promotional materials involving the name?
- Time Limits and Morality Clauses. Charities are increasingly seeking to put time limits on naming rights, and to ensure that they have a way out if circumstances change – in particular, if the name becomes a source of concern or embarrassment. These provisions are highly sensitive and should be carefully negotiated between the donor and/or the foundation and the charity.
- Remedies for Violation of the Agreement. These may include reversion of funds or “gift over” provisions, whereby breach of the agreement results in the transfer of funds to another charity or coordinated alternative solutions.
When all parties to a naming agreement respect the needs and imperatives of the other, the agreement can align both sets of goals, providing much needed resources to the charity and cementing the donor’s philanthropic legacy for years to come. Naming rights, while beneficial, are really just the tip of the iceberg when it comes to the benefits of having a private foundation. To learn more, check out our white paper The Top 10 Advantages of Having a Private Foundation.
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