10 Ethics Lessons for Nonprofits from the Dissolution of the Trump Foundation

January 11, 2020  |  Grace Duginski

Those of us with time in the nonprofit sector under our belts know that we're privileged to work alongside colleagues, volunteers, donors, and other partners with a zeal for the common good, expertise on the cause, and the deep-seated scrappiness needed to get the work done with limited resources. However, like every other sector, nonprofits and foundations are staffed by human beings who aren’t infallible. Some make mistakes, and a smaller minority may act in bad faith or otherwise demonstrate character that’s not unimpeachable. The value, of course, in rooting out corruption is the chance to dig out lessons and valuable reminders about how and why we do this work – here’s a heaping handful of them. 

The most immediate example of this strain of trust-undermining bad behavior is making headlines in the form of the Donald Trump Foundation, “a private not-for-profit corporation incorporated in New York… recognized as tax-exempt under Section 501(c)(3) of the Internal Revenue Code and… classified as a private foundation under Section 509(a).” Despite its status, the foundation’s behavior was recently described by the New York State Attorney General as a “shocking pattern of illegality” and “function[ing] as little more than a checkbook to serve [the foundation namesake’s] business and political interests”. 

The situation actually became so dire that Charity Navigator issued a High Concern advisory about the foundation – an action which only occurs under specific conditions, and which Charity Navigator decided was appropriate due to “concerns… serious both in nature and scope”. 

As a result of the investigation into their actions, the foundation will be dissolved under court supervision, and the eponymous founder and president may be barred from serving on any other New York charity Boards of Directors for ten years. He and his children will be required to undergo compulsory training to prevent them from replicating the same judgment errors in the future. 

It remains to be seen whether three of the adult Trump children, each of whom is a now-former director with over a decade spent on the board, may also be barred from serving on any other New York charity Boards of Directors for one year, but this is also a possibility. Currently, the foundation is in the process of paying out $2 million to a group of charities as part of its dissolution. 

What are some lessons we can learn from this unsavory situation? 

Before you solicit donations, always register in the appropriate state/s. 

The Trump Foundation failed to register with the New York State Charities Bureau before soliciting donations there. Registration with the Charities Bureau is obligatory for any organization wishing to solicit donations in the state of New York, but the organization chose not to complete this step on time despite the fact that New York is, comparatively speaking, a state where it can be quite straightforward to register to solicit donations. Don’t fall into this trap! Check relevant states’ deadlines early and often, and ensure that you’re in compliance before soliciting donations. 

Follow widely-accepted best practices for oversight by a Board of Directors. 

The suit brought by the state of New York alleged that the Trump Foundation’s directors “failed to meet basic fiduciary duties and abdicated all responsibility for ensuring that the Foundation's assets were used in compliance with the law.” To sidestep this minefield, make sure your board meets regularly and creates an accurate written record of their work. Any nonprofit worth their salt knows it’s important not to skip board meetings for 20 years – there’s simply no way to ensure any level of oversight without an engaged board, and this lapse could be considered a breach of fiduciary duty.

Establish a conflict of interest policy. 

Another basic element of appropriate board oversight and compliance is a conflict of interest policy to prevent self-dealing and other unethical behavior on the part of the board of directors. The Trump Foundation lacked such a policy, which is against the law in the state of New York. Other nonprofits can avoid this issue simply by adopting a conflict of interest policy and following other best practices as prescribed by law. (Here, again, seeking legal counsel will be worthwhile!) 

Set up and follow any other necessary financial policies, too. 

Depending on which state you’re based in, make sure you’re handling your assets appropriately. For example, the Trump Foundation let their reported $1 million in assets languish in a money market account instead of setting them up to earn money, which, after 2010, constituted another violation of New York law. Doing some deep planning work around how your nonprofit or foundation is run will allow you to focus on doing good work rather than wasting valuable time fussing with governance! 

Pay close attention to the political-speech guidelines for a registered 501(c)(3). 

The IRS explicitly states that “all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office”. The IRS is also clear that nonprofits who violate this rule can be stripped of their nonprofit status. This one’s pretty straightforward: don’t make disbursements to a political campaign – especially your own – if you’re a 501(c)(3).

If you’re new to the nonprofit space, or if you don’t maintain staff with expertise in nonprofit management or operations, toeing the line here can be tricky! Before you engage in specific forms of political speech, like endorsing candidates and making donations to candidates for elected office, consult with your general counsel to be sure you’re not veering into electioneering. If you’re not satisfied with the answers you receive from them, don’t hesitate to get a second opinion – consequences for violating this rule can be steep, up to and including investigations extending to include the IRS and the FEC and even the dissolution of your charity. 

At the end of the day, if you feel really compelled to act in ways that may not be allowed for501(c)(3)s, consider altering your status from 501(c)(3) to 501(c)(4), or another non- or for-profit status that allows for a greater range of motion in the electoral politics space. 

Don’t use organization funds to settle personal matters. 

For foundations, make sure you release funds to grantees only and don’t send foundation money to anyone not considered a grantee. 

Say, for example, you find yourself needing to settle legal claims against a business you own. Most of us know we shouldn’t use funds allocated for nonprofit work to pay those fees, since they’re a personal expense not pertaining to any nonprofit business! However, it seems to bear repeating that it’s a very bad idea to do this. 

Make sure not to dip into already-allocated funds for small personal expenses, either – even though it may be convenient, it all adds up! Say, for example, that it’s 1989. It costs $7.00 to register a new Boy Scout, and your second-eldest son is of Boy Scout age. Even if you operate a foundation named after you in order to distribute your wealth, you’d likely just pull a few dollar bills out of your own pocket to register your child instead of dipping into foundation funds to cover that cost, but the opposite is alleged to have happened in the case of the Trump Foundation. Being a stickler for following the rules, even for small amounts, will help nonprofits keep things on the up and up. 

Maintain a watchful eye on the ethics of selecting your grantees… 

It’s in a grantmaking body’s best interest to develop a rubric or other system for selecting grantees – as most foundations and nonprofits already know, this will ensure that funds are allocated effectively and quickly, and it’ll also help keep your organization on track to choose grantees based on merit. Making sure there are guidelines for what projects and organizations qualify for grants will ensure that decisions aren’t made “[on a] whim”. 

… And don’t dip into funds allocated for your nonprofit in order to extract an oversight-related thorn in your side. 

If you become the subject of a government investigation – say, in the state of Florida – it’s wise to avoid making a sizeable donation to the reelection campaign of the Florida State Attorney General in charge of said investigation.  Not only does this constitute an "oops" in the realm of political donations and 501(c)(3)s, as we’ve mentioned before, but making a gift to the party in charge of investigating you will rightfully raise questions. 

Additionally, should the person in charge of your foundation be elected to public office, they should interrogate their own desire to appoint one of the foundation’s largest donors to head a government office, as many will label this corruption. 

Set and implement stringent standards on appropriate uses of foundation funds. 

As we’ve already established, setting up and following guidelines for directing funds is one of the most critical aspects of operating a charitable foundation. These guidelines help prevent funds from covering inappropriate expenses – like, for example, a $10,000 self-portrait.  

Another thing to keep in mind is that even if your funds ultimately end up where they were meant to go, you can still run into problems if the money took an unethical route on its way there. (It does matter if, as a hypothetical example, the only reason those funds made it where they were supposed to go was because you were repeatedly compelled to pay them out.) Just like your fourth-grade math class, be prepared to show your work for every stage of your accounting process, and ensure that it’s a hundred percent above board. 

The biggest lesson of all: if you make a mistake, don’t lie about it. 

It’s upsetting to be found in the wrong! However, you'll do further damage to your reputation and shrink your own ability to recover if you take to the internet and lie about your misdeeds. Own up to it, learn from it, put that crisis communications plan into action, and prove you’re invested in your work to improve the world by simply doing better moving forward. 

While most nonprofits will (hopefully) never have to deal with ethical problems of this magnitude, there are always good reminders to be gleaned about checking all applicable laws and regulations, making sure to file the appropriate paperwork on time, and carefully documenting the use of funds. Setting appropriate internal policies and keeping the right documentation in order ensures that your organization stays on the right side of ethical and legal guidelines and can continue focusing on what you care about: making the world a better place.