The past several years have witnessed an inspiring shift in philanthropy: fueled by leaders like MacKenzie Scott, more funders are embracing trust-based philanthropy. The idea is powerfully simple: deliver funding with fewer strings attached, reduce burdensome reporting, and let grantees do what they do best.
But even as this approach empowers frontline organizations, the legal climate is changing—and not always in ways friendly to a minimalist model. In today’s environment of increased scrutiny, political prosecutions, and complex compliance obligations (from IRS rules to anti-terror sanctions), a hyper-simplified approach can expose funders to substantial risk.
The Case for Basic Protections
While funders absolutely should avoid needless bureaucracy, abandoning the basics of grant structuring, diligence, and compliance can undermine the very missions they aim to support. With government agencies targeting not just groups allegedly tied to violence but those connected to peaceful protest and advocacy, here’s why going back to basics isn’t just prudent, it’s essential.
The Current Reality and Risks of “No-Strings” Giving
Recent years have brought increased scrutiny not only from the IRS but also other federal agencies and even state regulators—especially as charity and advocacy work brushes up against issues of civil protest, rapidly shifting norms, or international engagement. Here are some of the specific risks funders face if grant agreements and diligence fall short:
- Loss of Tax-Exempt Status
If a grantee uses funds for unlawful activity (even nonviolent civil disobedience), or strays from “charitable” purposes under IRS rules, the funder and grantee can both face loss or suspension of tax-exempt status. Expect the IRS to rely on precedent (e.g., Rev. Rul. 75-384) where social change organizations lost exemption after promoting civil disobedience. However, the application of such precedent is fact-specific and subject to legal interpretation and challenge. - Asset Freezes and Enforcement Actions
Proposed and existing federal rules allow for the rapid suspension of a nonprofit’s status, and even freezing of assets, if agencies determine a group provided “material support” to prohibited activities under applicable law. The definition of material support is subject to statutory interpretation and judicial review. Note: H.R. 9495 is proposed legislation that would penalize indirect and sometimes unintentional aid; however, as of the date of this post, has not been enacted into law. Funders should monitor legislative developments and consult legal counsel regarding current requirements. - Vicarious Liability and “Attribution”
Under certain circumstances, a funder may face legal or reputational risk based on a grantee’s activities, particularly where the funder exercises control over the grantee’s operations or has knowledge of problematic activities. The extent of potential liability depends on multiple factors including the nature of the relationship, the funder’s level of control, and applicable legal standards. Well-structured grant agreements can help establish appropriate boundaries and reduce such risks. - Federal & State Investigations
Funders may become the subject of investigation if there is evidence suggesting that grants were used to support illegal activities or if funders had knowledge of or involvement in such activities. The mere fact that a grantee is accused of illegal acts does not automatically subject a funder to investigation. Supporting lawful protest activities, even if controversial, is generally protected under the First Amendment. - Negative Publicity and Litigation
Allegations against funders, even if ultimately unsubstantiated, can result in reputational harm and may prompt lawsuits or regulatory review. Funders should be aware that public scrutiny of grantmaking decisions is possible and should maintain appropriate documentation to respond to inquiries. - OFAC and Sanctions Enforcement
Funding groups or individuals subject to U.S. sanctions or involved in international activism can accidentally trigger major legal exposure—underscoring the need for robust OFAC compliance.
The Solution – Back to Basics:
Given these risks, even the most well-intentioned funders should adopt practical safeguards. Here’s our condensed checklist—drawn from long-standing sector best practices:
Grantmaking Checklist for Today’s Environment
To navigate these risks while still minimizing red tape, we recommend returning to a handful of best practices that balance simplicity with prudence:
- Entity & Activity Vetting
- Confirm the grantee’s IRS tax-exempt status.
- Check the grantee is in good standing with the state of incorporation and not on any sanctions lists (OFAC, anti-terror).
- Investigate key staff and board for compliance risks.
- Grant Structuring
- Use general support only for trustworthy, public charity grantees.
- For project grants, specify deliverables and ensure alignment to charitable and lawful purposes.
- Avoid direct or indirect earmarking that could support unlawful activity.
- Purpose & Activity Controls
- Expressly prohibit illegal uses in grant agreements: e.g., “Funds may not be used for any purpose that violates applicable federal, state, or local law.” Consider also including: “Grantee represents and warrants that it will comply with all applicable laws in the use of grant funds and the conduct of grant-funded activities.”
- Require compliance with applicable U.S. Department of Treasury Office of Foreign Assets Control (OFAC) sanctions regulations and, where applicable, anti-money laundering (AML) requirements under the Bank Secrecy Act and related regulations. Note that AML requirements typically apply to financial institutions rather than grantmakers, though funders should maintain appropriate due diligence practices.
- Include anti-discrimination and lawful use protections.
- Diligence & Recordkeeping
- Retain all vetting, correspondence, and compliance checks.
- Require grantee disclosure of any investigations or legal proceedings.
- Consider periodic review of publicly available information regarding grantees’ activities to ensure continued alignment with grant purposes and compliance with applicable law. Any such monitoring should be conducted in accordance with applicable privacy laws and should not be used to chill legitimate advocacy or expression.
- Reporting, Audit & Recoupment
- Require regular updates on expenditures and activities.
- Reserve reasonable audit and inspection rights in grant agreements. Include provisions allowing for recovery of funds in the event of material breach of grant terms, misuse of funds, or use of funds for purposes other than those specified in the grant agreement. Any such provisions should specify the process for determining misuse and provide appropriate notice and opportunity to cure where feasible.
- Ongoing Review
- Request proactive updates from grantees if circumstances change.
- Offer referrals or support for legal counsel, if needed.
- Board and Staff Training
- Train all involved parties on compliance, documentation, and risk management.
- Transparency
- Maintain clarity in communications and grant documentation—be specific about allowed and disallowed uses.
The Bottom Line
Good grantmaking isn’t about trust versus control—it’s about partnership rooted in shared responsibility. Funders can and should reduce grantee burdens wherever possible while maintaining appropriate safeguards. Detailed grant agreements, clear compliance representations, and rigorous recordkeeping serve to protect both funders and grantees by establishing clear expectations, documenting active oversight, and compliance with applicable legal requirements.
The recommendations in this document should be tailored to each funder’s specific circumstances, risk tolerance, and legal obligations. Funders should consult with qualified legal counsel to develop grantmaking policies and procedures appropriate to their situation.
By going “back to basics,” funders don’t just protect themselves—they help ensure their grants have lasting, positive impact for the causes and communities they want to serve.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.