Choosing a non-operating private foundation: Protecting donor intent in not-for-profit corporations

Creating a charitable trust for your private foundation carries significant advantages for donor intent, but it’s not the only option. Establishing a not-for-profit corporation offers more flexibility than a trust. This vehicle also simplifies the process of hiring employees and initiating contracts and leases. Plus, it provides more legal protection for directors.

But that flexibility and convenience come at a cost. Not-for-profit corporations carry 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.

That’s fine, of course, if your intention is to give future trustees carte blanche to use your charitable dollars as they see fit. If you’re concerned about donor intent, then establishing a corporate structure for your foundation requires careful attention.

Steps to protect your donor intent

How can you best safeguard your intent and still enjoy the benefits of a corporate structure? As always, time-limiting your foundation and creating a strong mission statement with supporting documents are essential elements. But another layer of protection could be through a hybrid structure for your foundation, provided it is 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 “members.” The members are given the exclusive power to elect and remove members of the board and to amend the articles of incorporation and bylaws. A donor committed to giving while living or to having a foundation cease operation within a decade or two of his or her death may serve as the sole member of the corporation and name a successor sole member.

Examples: The Rupe and Lewis foundations

The Arthur N. Rupe Foundation in California and the T. W. Lewis Foundation in Arizona are two examples of private non-operating foundations that were established with member corporate structures. 

In the latter example, Thomas Lewis is the sole member of the foundation and he appoints the seven members of the board of directors. Following the death of Lewis and his wife, the board will include three family members and five non-family members and will operate on a 10- to 20-year sunset schedule.

Donors who are not time-limiting their foundations (such as family foundations intended to operate for many generations) may 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 foundation’s original charitable mission.

In any case, donors should work closely with their legal advisers as laws around not-for-profit corporations are complex and vary from state to state.

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