In 2023, following passage of the Donor Intent Protection Act in Kansas, Philanthropy Roundtable launched a monthly series on donor intent developments and controversies nationwide to better inform you about this important topic. The Donor Intent Protection Act has now passed in Kentucky, Georgia and Montana, and efforts on behalf of this legislation will continue in additional states in 2025 and 2026.
We encourage donors to contact us with any questions about our featured items and consult additional resources on donor intent at the Roundtable’s Donor Intent Hub. We also welcome any news about donor intent we may have missed.
This month’s Donor Intent Watch opens with a piece about the nearly 1,700 libraries funded by Andrew Carnegie and how they have fared over time. This is followed by the eighth—and final—installment in a series on the importance of choosing the right vehicle(s) for your giving. This month we share the pros and cons of using private non-operating foundations.
Andrew Carnegie’s Lost 400
Between 1886 and 1917, philanthropist Andrew Carnegie funded the construction of 1,681 free public libraries in the United States. Based on personal experience, he believed they provided a path to opportunity regardless of one’s origins. In requiring the communities which housed his libraries to maintain them, Carnegie expressed his desire that they would become “as much a part of the city property as its public schools, and, indeed, an adjunct to these.”
This past October, the Carnegie Corporation announced $10,000 gifts would be made to Carnegie Libraries across the country to commemorate the 250th anniversary of the signing of the Declaration of Independence. The Carnegie Corporation determined about 1,280 of those libraries “still operate and acknowledge their link to Carnegie.” Given the challenges facing any donor who anticipates his wishes will last in perpetuity, this is a surprisingly positive outcome. Yet, there are those 400 lost opportunities for discovery and education.
Indiana received 164 Carnegie Libraries, more than any other state in the country. One reason for this may have been a state law allowing local entities in Indiana to levy a tax for libraries. Others suggest Indiana’s central location and its receptiveness to libraries because of its “bookish culture [and] widespread literacy.” Of the original 164 libraries funded by Carnegie in Indiana, 106 are still active public libraries. The remainder have been demolished or repurposed.
Among the repurposed libraries are the Hawthorne Community Center, the Carnegie Museum of Montgomery County and the Carnegie Center for Art and History, all of which provide some element of the self-education Andrew Carnegie promoted. The Mongomery County museum is, in fact, a division of the Crawfordsville District Public Library, and is eligible for one of the $10,000 grants from the Carnegie Corporation. But there are others that have drifted far from their donor’s intent. Greenfield’s historic and stately Carnegie Library is now a restaurant offering “a timeless dining experience where history meets modern hospitality.”
The good news is the original library has been well-preserved, the restaurant has taken the name “Carnegie’s” and guests have given the establishment a rating of 4.8 out of 5. And after all, along with Carnegie’s philanthropic achievements, he believed in a free enterprise economy: “The price which society pays for the law of competition, like the price it pays for cheap comforts and luxuries, is great; but the advantages of this law are also greater still, for it is to this law that we owe our wonderful material development, which brings improved conditions in its train.” So go ahead and enjoy your dinners, Hoosiers.
Read more about the Carnegie Libraries here.
Donor Intent Pros and Cons in Private Non-operating Foundations
Many donors have chosen to create private non-operating foundations as the vehicle for their philanthropy. “Non-operating” simply means the foundation’s chief goal is to make grants to various nonprofit organizations and not run its own programs. Most of the very large and well-recognized foundations—Gates, Rockefeller, Bradley, Hewlett—are structured this way. But so are tens of thousands of others, many of them very small.
Donors who establish private non-operating foundations may claim a charitable deduction for up to 30% of adjusted gross income (AGI) for cash donations and up to 20% of AGI for long-term publicly traded appreciated securities and other property. Publicly traded stock may be assessed at fair market value, while other types of property, such as privately held stock or real estate, may be valued on a cost basis only. Gifts from an estate to a private foundation are generally 100% deductible, meaning they are removed from the taxable estate.
Private non-operating foundations are required by federal law to make an annual distribution of at least 5% of assets, pay a 1.39% excise tax on investment income, limit the percentage of business enterprises they own, avoid self-dealing and grants to partisan political organizations and file a 990-PF tax return. Typically, a private foundation derives its endowment from a single source—an original wealth creator, a family or a corporation—and is managed by a board of trustees in compliance with state and federal laws in addition to the foundation’s bylaws, trust agreement or articles of incorporation.
Private non-operating foundations offer both benefits and drawbacks for donor intent:
PRO: Flexibility, autonomy, and control. Private foundations offer considerable leeway to operate and allocate charitable dollars as you see fit, largely free from government interference outside of legal regulations and mandatory reporting. You define the mission of the foundation, choose its lifespan, make investment decisions about its endowment and hire staff to manage grants and financial matters.
CON: Malleability, impermanence. That same latitude poses challenges. Depending on how the foundation is structured, future boards of trustees may amend its mission, bylaws, articles of incorporation, operations, leadership and so forth in ways that counter your decisions.
PRO: The ability to create a family legacy. If one of your chief goals is to create a philanthropic legacy for your family, a private non-operating foundation may be the right choice. This vehicle can extend giving through future generations, involving children and grandchildren in governance and grantmaking. Yet family foundations also pose certain risks to family peace and to donor intent.
CON: Increased complexity and risk of bureaucratic bloat. The IRS demands substantial reporting and paperwork from foundations, and some states also require annual audits. You will likely need help complying with state and federal regulations and filing appropriate reports. Hiring professional staff can pose challenges for donor intent, is costly and requires human-resource management and compliance with employment laws. In larger private foundations, a complex staff structure can contribute to bureaucratic bloat.
If you decide to use a private non-operating foundation as a philanthropic vehicle, there are two structural options: a charitable trust or a not-for-profit corporation, both of which are treated similarly by the Internal Revenue Service. Each structure has advantages and disadvantages that bear directly on donor intent, so the appropriate one depends on your objectives, tolerance for change and desire for flexibility. We discussed trusts in a previous Donor Intent Watch.
A private foundation created as a not-for-profit corporation offers greater flexibility than a charitable trust. Although the corporation form requires more paperwork and record-keeping than a trust, it makes some things easier, like the hiring of employees and the initiation of contracts. The flexibility of a corporation does, however, include serious drawbacks for donor intent. Your foundation’s charter or bylaws may be amended more easily, sometimes by a simple majority vote of board members.
If your intention is to give future trustees carte blanche to use your charitable dollars as they see fit, this structure is fine. But if you are concerned about donor intent, then establishing a corporate structure for the foundation requires careful attention. Aside from time-limiting the foundation and creating a strong mission statement with supporting documentation, you and an attorney should consider carefully where the foundation is incorporated because laws governing trusts and not-for-profit corporations vary from state to state.
Ideally you will choose states with laws supporting philanthropic freedom and restricting the state from attempting to direct foundations’ charitable missions or demanding personal information about foundation trustees, staff and grantees. Other important questions of state law include the scope of trustee indemnification and provisions permitting a foundation to move to a new jurisdiction, allowing it to take advantage of another state’s laws. In any case, a foundation’s “home state” will generally require it to register with the state’s charities bureau.
Delaware is generally the preferred jurisdiction for corporations, including nonprofit corporations, and is the legal home to many foundations that operate in other states. Delaware provides many advantages:
• The Delaware General Corporation Law (DGCL) is a modern, current and internationally recognized and copied corporation statute that is updated frequently to take into account new business and court developments.
• Delaware offers a well-developed body of case law interpreting the DGCL which offers certainty in planning.
• The Delaware Court of Chancery is considered by many to be the nation’s leading business-entity court, where judges expert in corporate and governance matters deal with issues regularly and efficiently.
• Delaware offers a user-friendly Division of Corporation office for document filings. Delaware governs its nonprofit corporations under the same state rules as for-profit corporations. Delaware corporate law is considered very flexible, and is even more accommodating for non-stock corporations. There are provisions in the Delaware law which allow non-stock corporations to choose how to organize their internal governance, including placing restrictions on the power of the board. A primary principle in Delaware corporate law is that the board of directors has the ultimate authority to manage and direct the affairs of the corporation. Most corporations find it desirable for the board to have such broad power to make substantial changes to the corporation over time.
For nonprofit corporations, however, this means that even ultimate purposes and mission can be changed. To protect donor intent, it may therefore be desirable to restrict the board’s power over the corporation, particularly where a founding donor of a private foundation wishes to ensure the foundation will continue to adhere to certain values, or support a particular giving area or geography, even if a distant future board might wish to deviate from that.
In Delaware the corporate board’s power can be modified in such a way, so long as those provisions are included in the certificate of incorporation and bylaws. One might, for instance, require a supermajority of the board for any fundamental change of mission, or require that some outside person or entity have special rights to approve certain changes. One might also say simply the purposes may never be amended.
You may also want to consider a hybrid structure for the foundation. If permitted by your state’s charity laws, a hybrid structure combines some advantages of both trusts and corporations. In this model, a donor can organize a foundation as a not-for-profit corporation with a board of directors, but provide that the corporation will have special “members” with exclusive power to elect and remove members of the board or amend the articles of incorporation and bylaws. The donor could serve as the sole “member,” or name someone who is especially trusted.
Donors who are not time-limiting their foundations (family foundations intended to operate for many generations are a good example) may use the hybrid structure and establish a trust to serve as the sole member of the corporation. The trust instrument should include a detailed statement of donor intent and the purposes of the corporation; specific criteria for trustees and a plan for trustee succession and a clear prohibition against changing the original charitable mission of the foundation.
While private non-operating foundations offer donors the opportunity to create lasting legacies, particularly in families anticipating multigenerational philanthropy, they do come with drawbacks. Private foundations face stricter regulations and reporting requirements from the Internal Revenue Service and are subject to mandatory minimum annual payouts. And while founders can initially control their foundations’ mission statements, governance structures, investment policies and grant recipients, protecting donor intent may prove more difficult.
Yes, it will be your legacy … if you can keep it.
