Sep. 20, 2012
Original article published by WealthManagement.com
By New York Community Trust general counsel Jane Wilton
I’m frequently asked, “What exactly is a community foundation?” My short answer is that, like private foundations (PFs), community foundations are grantmakers. But unlike, say, Ford or Gates foundations, a community foundation is a public charity and receives contributions from a wide range of donors, whose varied interests influence the kinds of grants the community foundation makes. The longer answer is somewhat more complex, and I’m delighted to share that answer here.
A Little Bit of History
The first community foundations were created a hundred years ago as a more efficient and effective way to handle distributions from permanent charitable trusts, most of which were set up through bequests. They also were mechanisms to deal with “dead hand” restrictions that outlive their usefulness, without resorting to an expensive and time-consuming court cy pres process to change the terms of a charitable trust.
Early community foundations were organized as unincorporated associations of charitable trusts. Each trust would incorporate by reference a common governing document. (The Resolution and Declaration of Trust creating The New York Community Trust is one example.) Beginning in 1971, in the wake of the 1969 Tax Act that distinguished between PFs and public charities, tax regulations recognized the component trusts of community foundations as a single entity and a public charity for tax purposes. Banks that adopt the common governing document serve as trustees of the charitable trusts and are responsible for investing the trust’s assets; the community foundation board handles the grantmaking—an early kind of outsourcing.
Today, most community foundations are organized as corporations and instead of separate component trusts, they have funds that don’t have separate legal existence. A handful of community foundations, such as The New York Community Trust,1 the Cleveland Foundation, and The Chicago Community Trust, are organized in both forms, offering trusts for those interested in having a bank manage the assets and in corporate form with the foundation making investment decisions.
What Do They Do?
Community foundations serve particular communities—communities of donors and communities of charitable need—typically with a geographic focus. They make grants to effective programs in their communities, which carry out the charitable purposes of the community foundations’ many funds and collectively meet the community’s needs. Most community foundations are large enough to have professional grant staff that vet grant proposals. These professionals know the needs of their community and commonly work with government and nonprofits on various issues. Sometimes, this important aspect of community foundations gets lost in the buzz around donor-advised funds, which are a newer invention of community foundations.2
Generally, community foundations offer four kinds of funds:
Unrestricted funds. These are unrestricted as to purpose, and the community foundation board sets priorities. These funds allow the community foundation to move quickly to react to changing community needs and provide resources for long-term commitments to particular issues.
Field-of-interest funds. These funds allow donors to define one or more areas of charitable concern. The field may be as broad as “girls,” “the environment,” or “health and welfare,” or as specific as early childhood literacy or scholarships for students who attended a particular high school.
Designated funds. These funds are for donors who want to support particular organizations and create funds to support them. Designated funds may make sense when the grants are to support specific programs at those organizations, when a donor is concerned that an organization may change or even go out of existence, or when an organization is too small to effectively handle a substantial bequest.
Donor-advised funds. Donor-advised funds typically are legally unrestricted funds (field-of-interest funds can also be advised) that allow the donor—or someone he selects—to recommend grants to qualified nonprofits. The law is clear that donors must give up control and thus the community foundation may decline a recommended grant. Community foundations offer donor-advised funds as a way to increase giving in their communities, with the hope that donors will become so connected to the community foundation that they leave assets in the fund for the community foundation to use to support its competitive grantmaking.
Under the tax law, all community foundations must have the authority to change the purposes of a fund under certain circumstances. As defined in Treasury Regulations Section 170A-9(e)(v)(B)(1), a community foundation’s governing body must have the power
…to modify any restriction or condition on the distribution of funds for any specified charitable purpose or to any specified organization if in the sole judgment of the governing body such restriction or condition becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served.
The variance power ensures that designated or field-of-interest funds don’t become obsolete.
There are several benefits to working with community foundations. Such benefits include:
Knowledge of the community. Because the community foundation is focused on the totality of a community’s needs, it can weave together broad-scale solutions from all its funds and test new approaches. And, the reason a community foundation can attack an issue from so many angles is because of the different funds it holds—for example, a fund for education, a fund for women and girls, a fund for job training, all rounded out by unrestricted dollars.
Succession. The community foundation can be the answer to that thorny question, “Who will run my private foundation when I’m gone?” A PF can be terminated into the community foundation, which will continue to make grants bearing the donor’s name. Similarly, a bequest to a community foundation can establish a fund in perpetuity.
Professional staff. It’s too costly for family foundations that don’t have tens of millions of dollars in assets to hire professional staff to review proposals for grants, vet organizations and meet administrative challenges of filings and tax reporting. The community foundation staff handles all of this, and more.
Investing. Community foundations are skilled in investing assets, as well as seeking grant opportunities that mesh with donors’ interests.
Family. The community foundation can involve family members and introduce the next generation to the “ins and outs” of thoughtful grantmaking. In addition, if (as sometimes happens) the next generation of family members doesn’t want to work together, the community foundation can serve as a buffer.
Collaboration. Community foundations can and do bring various players together—funders, nonprofits, and government—for more effective grantmaking.
1. The New York Community Trust is the community foundation serving the New York Metropolitan area. In 2011, it made grants of $137,000,000 from assets of $1.9 billion. For more information about community foundations in your area, visit the Council on Foundations at www.cof.org.
2. Although The New York Community Trust set up donor-advised funds in 1930s, they gained momentum in the 1980s.