Private foundations for ordinary folks

by Philip Brewer on 28 August 2007 2 comments

There are a lot of advantages to having a private foundation to use as the vehicle for your charitable giving. Sadly, the tax laws make setting up a private foundation impractical unless you're wealthy. Fortunately, there's an alternative that's very nearly as good: a community foundation.

Advantages of a private foundation

The main advantages of a private foundation are:

  1. You can separate the step of donating the money from the step of granting the money to some particular organization that you want to support. In particular, you can donate the money when you have it (and, perhaps, when there's a tax advantage to making the donation), without having to decide exactly what organization will eventually get the money.
  2. You can create an endowment, making a gift where the capital sum of the gift is invested and the income is made available to the local service organizations or philanthropic projects that you want to support. Your single gift goes on supporting your charitable objectives into the future.

You can get both of those advantages from a community foundation, without having to go through any of the paperwork or expense of creating a foundation. Community foundations were created for exactly this purpose. There's a community foundation for most cities and many towns, and the service area of community foundations usually includes the smaller towns and villages nearby.

Using a community foundation

The most flexible option is to create a "donor advised fund." You donate money to the community foundation, which creates a fund for your philanthropic interests. From time to time you send a letter to the fund telling them to make a grant to some local organization. It's called "donor advised" for a reason: technically the foundation owns the money (that's why you get a charitable deduction when you donate the money). But in practice, the whole point of the community foundation is to carry out the wishes of the donors. As long as your request is legal--that is, it supports an actual charity--the foundation will pretty much do what you ask.

Beyond just doing what you ask, the community foundation also provides a certain amount of extra value in the form of research, suggestions, contacts with local charitable organizations, and knowledge of local needs. Although this will vary a lot from foundation to foundation, it can be a big help in making your gift as effective as possible, and in saving you time and effort.

Simpler than the donor advised funds are "field of interest" funds, where you simply specify a particular area that you want to support (medical research, youth programs, historical preservation, human services, etc.) and the foundation will use your money to make grants in support of activities in that area.

You can also specify a specific organization to receive the income from your donation. Here again, the community foundation provides some additional value. If the organization that you specified disappears (which may very well happen eventually--since they're only spending the income and are preserving the capital, there's every possibility that your fund will exist in perpetuity), the community foundation will pick one or more replacement organizations, doing their best to make sure that the money continues to support your charitable intent.

Local organizations would, of course, be pleased to receive the whole gift. However, most local organizations would find some excuse to go ahead and spend the money right away, rather than spending just the income. My father and I talked to the senior center in the town where his parents had lived, indicating that we wanted to make a gift to support projects in memory of his parents. They were enthusiastic, describing a similar gift that had been made a few years earlier, where the income went to fund an annual bus trip to a major league ball game. They admitted, though, that after making the trip for a few years, one year they had a budget deficit just about the size of the principal that funded the baseball trip. The spent the principle, and the annual trips ended. If the money is in the hands of a foundation, that sort of result can be avoided.

A community foundation is particularly attractive if you have a lump of money that you want to donate that is not representative of your future giving. For example, a friend of mine earns a modest sum every year from some software that she wrote years ago. She doesn't need the money to live on, so she donates it to charity each year. One year, though, the software did very well, and she ended up with several thousand dollars. That put her in something of a quandary. If she gave the whole sum to one organization in one year, she would suddenly become a major donor and could expect to be wooed to make future large donations--which were not in the cards, because the software could not be expected to produce such outsized returns in future years. On top of that, she had tended to rotate her donations among a few similar organizations, and now she was face with either changing a rotating practice that had worked well (perhaps by splitting the money), or else giving an outsized donation to just one of the organizations that she supported and not the others.

I suggested that a community foundation donor advised fund could solve all those problems. She could donate that year's large sum, and future sums of whatever size. The fund could make donations to each of the groups she supported, in exactly the same rotation she'd been following.

Finding your community foundation

It's pretty easy to find your community foundation: Just google "community foundation" plus the name of your town or the nearest city. There is also a tool for finding your local foundation at communityfoundations.net and at the Council on Foundations. (They seem to both point to the same tool, which seems to be down just now as I write this, but that I assume will be working again shortly.) Besides providing the locator tool, their websites are also excellent resources for anyone interested in charitable giving.

A nationwide alternative

There is one circumstance where a community foundation isn't the best choice: if most of the groups you want to support are not local. (Community foundations, by their very nature, prefer to support local groups.) In that case, one option to consider would be the Fidelity Charitable Gift Fund, or one of several similar funds available from other mutual fund companies. These funds work more or less exactly like the donor advised funds in a community foundation, although there's some concern that they're not properly policing the directions that come from the donors.

There are a lot of worthy causes--local, regional, national, international--and a lot of organizations that will take your money and do good work. A community foundation is a tool that you can use to manage your charitable giving, especially in cases where you're in a position to make a larger-than-usual gift in one particular year, and especially where you want to support local charitable activities.

5
Average: 5 (1 vote)
Your rating: None
ShareThis

comments

2 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Julie Rains's picture

Great post on a valuable subject: leaving a legacy and influencing the community through targeted giving. If you don't mind, I may add if you want to see the approach that your local foundation takes to evaluating grants and charitable organizations, apply for a grant for whatever organization you are associated with (civic group, school, religious group, or start your own!); then you can see how open they are to new ideas and how stringent they follow guidelines. 

 

Philip Brewer's picture

Testing the charities that you're considering supporting is a good idea, and that's a good way to do it.

Thanks for the kind words!