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The right charitable vehicle for your philanthropy depends on your goals and charitable objectives. Each giving entity offers you a different level of control and varying levels of responsibilities with regard to the distribution, management, and investment of your assets. And some charitable vehicles will support your philanthropic objectives and mission better than others. By matching the appropriate giving vehicle to your philanthropic mission, you will improve your chances of achieving your objectives and, over time, preserving your intentions.
This is not an either/or choice. Many donors use more than one charitable vehicle to further their philanthropic objectives. Aside from your mission and objectives, you should also take into account your estate- and tax-planning goals. The right giving entity for your philanthropic mission also hinges, to varying degrees, on whether or not you wish to establish your entity for a predetermined period of time or in perpetuity. Whether or not family members will play a role in your philanthropic legacy is another important consideration.
Charitable vehicles differ in the level of protection they afford your intentions. That is, they vary in how they can be structured, and some structures are more conducive to protecting donor intent than others. In general, however, the greater level of flexibility afforded by the charitable vehicle and the longer its lifetime, the greater possibility that donor intent may someday be compromised.
The most widely established charitable vehicle is the private, non-operating foundation. (Private foundations are “non-operating” when they primarily make grants to charities rather than run their own programs.) Non-operating foundations include well-known grantmakers like the Rockefeller Foundation, the Ford Foundation, and the Bill and Melinda Gates Foundation. They also include small family foundations and large corporate foundations.
Private foundations are non-governmental, not-for-profit organizations. They are subject to federal and state laws intended to assure that they serve charitable purposes. These rules include an annual distribution requirement (5 percent of the value of its assets), an excise tax on investment income, limits on the percentage of a for-profit enterprise they may own, prohibitions forbidding self-dealing, and restrictions on grantmaking for certain kinds of recipients and activities.
Private foundations typically derive their principal funds from a single source, such as an individual, family, or corporation. These funds are governed and managed by the foundations’ trustees or directors in accordance with the foundation’s bylaws, trust agreement, or articles of incorporation, as well as with the laws governing charitable organizations in the state in which they are located.
Private foundations enjoy a great degree of autonomy. You can structure them to carry out your charitable mission precisely as you wish, or, at the very least, with relatively little government interference. Unfortunately, that same autonomy can also undermine your charitable intentions over time. Donors who establish private foundations with specific charitable missions must take steps at their foundation’s inception to help ensure that their intentions will be honored for the life of their foundation.
Most private foundations are set up to operate in perpetuity, but donors can limit the lifespan of their entity. Most foundations make annual grant allotments to tax-exempt public charities from the investment income derived from their endowments (though some private, non-operating foundations, like corporate foundations, act more like pass-through entities, distributing the funds that the foundation receives each year from its associated company rather than building up an endowment over time).
One advantage of foundations is their ability to hire staff to make philanthropic decisions and administer grants. The flip side of this flexibility is that foundations sometimes have higher cost structures than other forms of giving. Depending on the size of a foundation, it may need financial advisors to manage assets, staff to evaluate grant applications and administer distributions, and accountants to help the foundation comply with regulations and to file annual reporting documents. The IRS has substantial reporting and paperwork requirements for foundations, and some states, like California, also require annual audits. There are, however, a growing number of companies offering low-cost administrative services to private foundations.
Donor intent. Private foundations afford donors a great deal of control. As a donor to a private foundation, you can retain nearly complete control over the management and investment of the assets contributed to your foundation. You can decide which organizations will receive contributions, and when to make distributions. During your lifetime, you can select your trustees, hire your own staff, and define geographical, philosophical, and religious limitations. You can choose to maintain a family line of directors in perpetuity, if you wish. With a private foundation, you can take steps to institutionalize your intentions and mission in a manner that will help to preserve your intentions over time.
There are other advantages to independent foundations particular to families that bear on donor intent. By their very nature, and due to the level of control they allow donors, independent foundations can memorialize a family’s philanthropy. They can clarify and articulate deeply held family values and principles, involving family members over many generations and allowing them to engage actively in programs and grantmaking. A private foundation also allows the family to take greater risks in investing and to implement a long-term investment philosophy. If establishing a family philanthropic legacy is your intention, a private non-operating foundation may be the surest vehicle for securing that goal.
Structuring for donor intent. There are two principal options for structuring a private foundation: a non-stock corporation or a charitable trust. (Your charitable entity’s tax-exempt status is not contingent on which of these you choose. Tax-exemption derives from the expenditure of funds for charitable purposes.) Each structure has advantages and disadvantages that bear directly upon donor intent. Which structure is right for your charitable entity depends upon your tolerance for change and your desire for flexibility.
In general, a charitable trust is more restrictive, limiting the activities of the foundation to those things enumerated in the trust instrument. In theory, this gives trustees little room to stray from your intentions. Formal departures from the terms of a trust can usually be made only through a petition to an appropriate court, and the attorney general in the state where the trust is established is usually a party to such proceedings.
Trustees, therefore, generally must convince both a court and an attorney general when seeking changes to the original terms of the trust. Changes are generally not permitted unless the original purpose of the trust is judged to be either impossible or impracticable. In these cases, the courts may invoke the cy pres doctrine to devise a course of action that comes as close as possible to the trust’s original charitable purpose. Courts and attorneys general may vary, of course, in the strictness with which they apply the doctrine.
A charitable trust integrates your intentions in a legal structure that is—at least in theory—difficult to change. While a charitable trust structure generally offers the best protection against breaches of donor intent, it is not a fail-safe mechanism. Within the last 50 years, serious violations of donor intent have occurred within charitable trusts as well as corporations. Whichever charitable vehicle you ultimately choose, whether corporation or trust, it will not in itself be sufficient to safeguard your charitable intentions over time.
Remember: it is necessary to think carefully about choosing the vehicle (or vehicles) through which your giving will be conducted. But it is not sufficient.
Establishing a private foundation as a corporation offers greater flexibility. It is a more desirable structure for donors who intend for their foundations to have employees, contracts, leases, and so forth. It may also make sense for donors who would like future directors to chart the course of their foundation. With a corporation, the foundation’s charter or bylaws may be amended more easily—sometimes by a simple majority of board members.
A corporate structure retains the powers given it by state statute, and these can vary from state to state. Moreover, state legislation can affect a corporation’s activities with new legislation. The California Nonprofit Integrity Act of 2004, for example, adopted new governance rules for nonprofits, including requirements for annual financial audits for foundations. Finally, in most jurisdictions it is not particularly difficult for directors to amend articles of incorporation or bylaws in ways that do not conform with the terms of the original governing documents or the intentions of their founder. This kind of flexibility, inherent in the corporation structure, can be detrimental to donor intent.
Establishing a corporate structure with members who elect directors—as opposed to simply having directors who are self-perpetuating—is one way of reducing flexibility while retaining the corporate configuration. Within this structure, members are somewhat analogous to shareholders in a for-profit corporation, in that they can elect (and remove) members of the board, but they are not necessarily on the board themselves. Members are typically fewer in number than directors, and they are appointed by the founding member, typically the donor, during his lifetime. The Arthur N. Rupe Foundation in Santa Barbara, California, is one example of a private, non-operating foundation that has a member corporate structure.
At the Rupe Foundation, the founding member, Arthur N. Rupe, may appoint or remove any of the other members. To date, he has appointed members who share his philosophical vision and who act as a safeguard for his intentions. Once Rupe is no longer capable of appointing members, the members will either become self-sustaining or the membership structure will dissolve. Thus, the membership structure can be especially useful to donors who want to retain control over their foundation during their lifetimes. Not all jurisdictions, however, have statutory provisions that allow for member nonprofit corporations.
Finally, some donors have taken additional steps to safeguard donor intent by stipulating that a percentage of their foundation’s board members be made up of individuals from pre-determined third-party organizations named in the foundation’s bylaws. Often these are organizations that the donor has been involved with for many years. They share the donor’s philosophical outlook and act as a “watchdog” to ensure that his intentions are being carried out by the board. Other donors have given legal standing to third-party organizations that allows them to bring action against the foundation if it strays from donor intent. Still others have stipulated that regular donor-intent reviews be carried out by third parties—with real consequences for the foundation’s leadership if donor intent is found to have been violated. Finally, some foundations’ bylaws grant outside organizations the power to appoint the foundation’s directors. The strengths and weaknesses of these strategies in preserving donor intent are considered in greater detail in Chapter 7.
Domicile. Laws governing trusts and not-for-profit corporations vary from state to state. Choosing a home for your foundation can be an important decision regarding donor intent. Delaware, for example, has a notably expedient court system, flexible corporate laws, and a renowned position as a corporate and financial center, making the state an attractive legal home for private foundations regardless of their philanthropic focus. In fact, Delaware is the legal home to many foundations that fund exclusively in states far from Delaware. Likewise, Florida, Virginia, and Texas have enacted provisions into law that support philanthropic freedom and that restrict the state from attempting to direct foundations’ charitable missions or giving.
Other important questions of state law include the scope of trustee or director indemnification; the filing requirements for operating a foundation; and provisions permitting the board to transfer the foundation into a new jurisdiction, which can allow the foundation to take advantage of another state’s laws. The donor must determine whether, and how much, flexibility will be desirable. In any case, a foundation’s “home state” will generally require the foundation to register with the state’s charities bureau.
Some private foundations are established as, or later become, operating foundations. Private operating foundations use the majority of their revenue to provide their own charitable services and programs. They make few or no grants to outside organizations. Museums, libraries, and research facilities such as the Getty Trust and the Carnegie Endowment for International Peace are examples of operating foundations.
Liberty Fund, located in Indianapolis, is an operating foundation that was established to encourage the study of the ideal of a society of free and responsible individuals. Its founder, Pierre F. Goodrich, believed in a unique educational model for advancing the ideas that underpin a free society. He was convinced that education in a free society requires a dialogue centered in the great ideas of civilization, and he advanced this notion through focused seminars directed by scholars.
Goodrich founded Liberty Fund in 1960 to develop, supervise, and finance its own educational activities in order to foster thought and encourage discourse on enduring issues pertaining to liberty. Goodrich had to create, by establishing an operating foundation, the very organization that would carry out his intentions. He understood that operating foundations are best suited to philanthropic missions that are unique and that cannot be carried out by an existing organization.
To qualify as an operating foundation, your organization must spend at least 85 percent of its adjusted net income or its minimum investment return directly on its exempt activities—its programs. An operating foundation is not subject to minimum charitable distribution requirements. As a further benefit, contributions to private operating foundations are deductible up to 50 percent of a donor’s adjusted gross income, whereas contributions to non-operating foundations are generally limited to 30 percent. Finally, a private operating foundation may receive qualifying distributions from a non-operating foundation if the non-operating foundation does not control the operating foundation.
Because private operating foundations fund, direct, and administer their own programs, they have direct control over how their funds are spent. If programs and operations stray from the foundation’s philanthropic mission, they have no one to blame but themselves. In this way, operating foundations may be said to be a more satisfactory way of securing and preserving donor intent than non-operating foundations.
Operating foundations, however, are also subject to many of the same problems as a non-operating foundation, including mission creep. Nor are they immune from the deleterious effects that time can have on a donor’s intentions. In other words, while an operating foundation gives you and your directors more immediate control over how your charitable funds are directed, it does not necessarily guarantee that the foundation as a whole will stay true to its mission over time.
Community foundations are tax-exempt, nonprofit, autonomous, and publicly supported philanthropic institutions composed primarily of permanent funds established by many separate donors. Historically, they were established for the long-term and diverse charitable benefit of the residents of a defined geographic area. According to Foundation Center, there were 737 community foundations in 2009, the last year for which data is available.
The Columbus Foundation in Columbus, Ohio, for example, was established in 1943 by Harrison M. Sayre and a group of concerned citizens who wanted to improve their community through charitable giving. Today, the Columbus Foundation is the ninth largest community foundation in the country, with over $1 billion in assets representing over 1,800 donors. Like other community foundations, Columbus’ assets are composed of an assortment of unrestricted funds that the foundation can use to fund its own programs, like its Safety Net Fund, which helps the region’s most needy citizens. It also contains funds restricted to specific charitable purposes through outright gifts or planned gifts.
Columbus also manages donor-advised funds and supporting organizations. Like most community foundations, donors who make gifts through the Columbus Foundation are no longer restricted to a specific geographic area in their giving. In order to compete in an emerging philanthropic-services marketplace, most community foundations have broadened their giving missions and donor services.
Donor intent. Community foundations allow expression of individual philanthropy in a public charity setting. When you choose to donate to a community foundation, you have a number of options.
- First, you may give to a general unrestricted fund, which allows the foundation the most flexibility to respond to community needs and to fund its own programs. This gives you the least control over how your charitable gift will be directed.
- Second, you can set up a designated fund, which allows you to retain some control over the ultimate use of your philanthropic dollars. Many community foundations, for example, allow donors to establish scholarship funds designated for the benefit of particular schools.
- Third, you can create a donor-advised fund, which affords you more, but not ultimate, control over where your charitable dollars will be directed.
Several other types of designated funds at community foundations allow donors to have limited control over the recipients of their philanthropy, including field-of-interest funds, scholarship funds, and restricted funds. In each case, you can broadly designate where and when the money ought to go.
It is important to recognize, however, that most gifts to community foundations are precisely that: gifts that you no longer control. Even with designated funds, the community foundation frequently maintains flexibility for grantmaking within broadly defined and predetermined categories. Most funds are ultimately owned and controlled by the foundation. Some donor-directed funds revert to the community foundation’s general unrestricted fund after a period of time or after the death of the donor. Grantmaking activities are usually overseen by a governing or distribution board that is supposed to be representative of various community interests.
With community foundation donor-advised funds, you can reasonably expect to exercise informal influence over the distribution and investment of your funds. Nevertheless, even donor-advised funds are no longer your funds once you have gifted them. They belong to the community foundation. You may advise but you cannot control.
Historically, community foundations were the only option for donors who wanted to support their local community but who did not have the assets, time, or interest to establish their own charitable entity. As competition for philanthropic services has increased, however, donors now have many more options.
Some donors remain wary of community foundations because of their discretionary philanthropy. Many community foundations, for example, quietly refrained from making grants from their discretionary funds to the Boy Scouts because of its policy on homosexual adult leaders. Gifts to family-planning organizations and polarizing community activist groups have also alienated many donors from their local community foundations. For these donors, the philosophical outlook of their local community foundation simply does not match their own. Needless to say, if your funds are ultimately controlled by an organization that does not share your philosophical and philanthropic outlook, there is little chance that your intentions will be preserved over time.
Public charity organizations that function like community foundations but that are mission driven and have a national reach have emerged in recent decades. These organizations offer the kind of philanthropic investment advice and giving vehicles found in community foundations. But instead of a geographic region, they are organized to support a specific cause or point of view.
For example, DonorsTrust, based in Alexandria, Virginia, is philosophically committed to the ideals of limited government, personal responsibility, and free enterprise. It was founded in response to charitable organizations—like many community foundations—that don’t always share the same principles as their donors, potentially creating conflict over donor intent. Other mission-driven public charities also work with like-minded donors who share their approach to giving. Funders interested in supporting left-of-center nonprofits, for example, can work with the Tides Foundation. Similarly, there are scores of mission-driven public charity intermediaries for Catholic, evangelical, and Jewish donors.
What mission-driven charities offer you in structuring your philanthropic entity is the opportunity to create your philanthropy with like-minded people. Such groups often prove to be good stewards of your philanthropic legacy because they share your philosophical values.
Donor-advised funds originated within community foundations as a way for donors to establish a relatively small individual fund and to designate their fund’s recipients. Donors receive tax deductions for their contributions and at the same time give up formal control of its investment or distribution. Donor-advised fund services are increasingly being offered by other types of public charities (like Rotary International and World Vision), federated giving programs (like United Way), universities, and other charitable institutions. There are also commercial donor-advised funds, which have greatly expanded since Fidelity launched its Charitable Gift Fund in 1992.
The principal advantage of donor-advised funds is their simplicity. They have relatively few rules and restrictions, and the tax benefits are immediate, even though distributions can be deferred for many years. Gifts of cash are tax-deductible up to 50 percent of adjusted gross income, and they are not subject to the excise tax or to an annual payout requirement. Nevertheless, donor-advised funds typically have high payout rates, usually about 15 percent.
Organizations that host your fund can also accept gifts such as art, land, and business assets with significant tax benefits. Much of the costly administrative work associated with any philanthropic initiative—such as processing applications, philanthropic planning, as well as tax, legal, and accounting services—is carried out by the host organization. A donor-advised fund can be established online or over the telephone. In sum, the cost of a donor-advised fund is often considerably lower than the cost of operating and administering a private foundation.
It is also worth noting that an account at a donor-advised fund cannot be used to fund your administrative staff, foundation expenses, or family office. (Unlike a private non-operating foundation, donor-advised fund expenditures can only be made to qualified nonprofit entities, not to operating expenses.) In some cases, a donor-advised fund provider may be willing to hire a philanthropic consultant to assist with gift planning and pay the consultant from its general operating funds. (In return, the provider would likely charge the account additional administrative fees to defray the direct and indirect costs of hiring a consultant.) Of course, an individual establishing a donor-advised fund account could, at his own expense, hire staff to assist him with his charitable giving.
Donor anonymity is an especially important benefit of donor-advised funds. Because your gift is made to the host organization, distributions from your fund can remain anonymous, if you choose. This is an important factor for individuals who do not want to be inundated with solicitations or have their giving history made public through annual IRS filings, or who simply want to keep their charitable giving anonymous.
Donor intent. While donor advised funds do offer convenience and anonymity, it is important to understand that once you have made a contribution to a donor-advised fund, those funds no longer belong to you. Regulations mandate that your charitable contribution must be irrevocable and unconditional in order for you to receive the associated tax benefits. You cannot, for example, use your donor-advised fund to pay off a personal pledge. Furthermore, donor-advised funds cannot contain material restrictions or conditions that would limit the autonomy of the host organization over the fund. The host organization legally retains final discretion on where to donate.
The independent discretion of a donor-advised fund carries important implications for donor intent. While in practice the donor’s wishes are usually followed—that is only good for business, after all—host organizations can and sometimes do reject the donor’s recommendations. On the one hand, host organizations need their clients to feel as if they are in control of their donor-advised fund, in order to maintain good customer relations and grow their portfolio. On the other hand, federal regulations require host organizations to prove that you are in fact not in control of the fund.
To help secure their intent, individuals using donor-advised funds should have contingency plans in place in case their funds retain significant assets at the time of their death. For example, there should be a named successor advisor. The principles that govern the selection of board members are applicable to the selection of a successor advisor. (For further information on choosing board members, please see Chapter 5.) Similarly, it is worth considering a sunset clause for assets still held in donor-advised funds.
A final word of caution: because of their relative newness and rapid growth, donor-advised funds have been subject to increasing regulatory scrutiny. Lawmakers have considered from time-to-time whether or not the funds should be subject to minimum distributions and an excise tax on investment earnings, similar to private, non-operating foundations. Regulatory changes in this realm could adversely affect your charitable intentions.
A supporting organization is a distinct legal entity that has a supporting relationship with a public charity. Because of this supporting relationship, it qualifies as a public charity rather than a private foundation even though it may have only one donor or one family of donors. It is one of the few organizations that has public-charity status for tax deductibility but is not required to meet the public-support test (that is, it does not need to receive at least one-third of its support from the general public).
Although a supporting organization may be formed to benefit any type of public charity, the use of this form is particularly common in connection with community foundations, university endowment funds, and organizations that provide essential services for hospital systems. Supporting organizations can save donors from the paperwork, administrative, and reporting responsibilities associated with a private foundation. Also, generations of family members may act as advisors to the organization—whose board can comprise at least some donor-chosen members—and retain control over the choice of grantees, the timing of distributions, and investment policies.
Contributions to a supporting organization qualify for more favorable tax advantages than those used to establish a private foundation. Also, supporting organizations are not subject to minimum annual distribution requirements. The day-to-day operations of a supporting organization are typically handled by the supported organization, which is attractive to donors who do not want to be involved in the administrative duties, grant management, and IRS filings. Along with these advantages, however, come important drawbacks regarding control. By law, the supporting organization cannot be controlled by the donor. Establishing the supporting organization and realizing the enhanced tax advantages entails making an irrevocable gift, which you cannot control. In most cases, the supported organization will be respectful of the donor’s intentions during his lifetime—they are interested in future gifts. Once the donor is no longer in a position to make future grants, however, the supported organization loses an important incentive to honor donor intent.
While a supporting organization can operate in much the same way as a private foundation, there are important ways in which it is different. To qualify as a supporting organization, a foundation must meet one of three legal tests that assure, at a minimum, that the supported charity has some significant influence over the actions of the supporting organization and that the organization is responsive to the needs of the charity. In other words, in a supporting organization scenario, the organization supported by your philanthropy must have influence over your grantmaking. If you choose this charitable entity to carry out your philanthropic mission, you should recognize that the supported organization may come to exercise considerable influence over your philanthropic intentions over time. You should also give careful consideration to securing expert counsel—supporting organizations are complicated.
Donor intent. Consider the example of the Robertson Foundation. Charles and Marie Robertson established a supporting organization in 1961 to train young Americans for careers in public service (specifically in diplomatic or international roles) at Princeton University’s Woodrow Wilson School of Public and International Affairs. At the time, the Robertsons’ gift of $35 million was the largest donation ever made to the university.
As a supporting organization, the Robertson Foundation was typical in that it was established primarily to support the activities of Princeton University. One of the advantages of a supporting organization is that it allows donors to be involved in decision-making regarding the investment and distribution of funds. As such, the Robertsons, and subsequent generations of family members, served on the foundation’s board along with representatives from Princeton.
Over time, however, family members discerned that the university was no longer carrying out the original intent of the gift and, instead, was using the supporting organization’s funds, which had swelled to over $900 million by 2007, for other, unrelated activities. Family members were outnumbered by university representatives, four to three, on the board. After making great efforts to resolve the issue, the family members sued the university in 2002, beginning a long legal battle that was finally settled in 2008, when Princeton paid approximately $100 million to the Robertsons in what has been called the largest donor-intent award in history.
The supporting organization vehicle was probably not the right vehicle to safeguard the Robertsons’ intentions over time, especially after the death of the original donors. While it did give their heirs as directors standing to litigate, the nature of the vehicle stacks the cards against the preservation of donor intent. That is, a supporting organization must at minimum share authority with the supported organization. Over time, the interests of the supported organization may very well come into conflict with the intentions of the supporting organization and its founders.
At a more general level, there may be strategies donors can use to protect their intent in establishing a supporting organization. If a donor has allies within the supported organization—a trusted faculty member, for example, or perhaps a close associate on the board of the organization—he can ask that those individuals be appointed to the board of the supporting organization, thus filling the slots reserved for representatives of the supported organization with people who are likely to be sympathetic to the donor’s wishes. Another fallback strategy may involve including an exit clause providing for the funds to go to an alternative organization, in the event that the supporting organization finds itself unable to carry out the donor’s instructions.
Different Vehicles, Different Purposes
For many donors, the choice of a giving vehicle is not an either/or question. A family may have a family foundation, a number of charitable trusts, and several donor-advised funds, each with its own purpose and strategy. Today, donor-advised funds are regarded less as alternatives to other giving vehicles and more as potential complements to a family’s other charitable entities. In choosing the right giving vehicle for your philanthropic mission, it is important to match and structure each vehicle according to the charitable goals and objectives you wish it to serve. It is important for you to consider what values you would like your philanthropic dollars to advance, and to choose the giving vehicle or mix of giving vehicles most likely to accomplish your goals.
More Donor Intent Resources from The Philanthropy Roundtable
Protecting Donor Intent by Jeffrey J. Cain
- Get an electronic or print version of this practical guidebook.
- The Philanthropy Roundtable website’s special Donor Intent section where you can find our most recent articles and resources related to protecting donor intent.
Donor Intent Resource Library
- This extensive resource library will direct you to the best articles, books, and discussions on the topic of donor intent