By Bryan Clontz, CFP
As philanthropic advisors, our job is to recommend the best method to meet our client’s charitable objectives. If a direct gift is not appropriate, we generally begin to weigh the pros and cons of public foundations (i.e., community foundations or supporting organizations) and private foundations. All too often, the final recommendation tends to be one vehicle over the other when, in fact, using a combination of vehicles may be the perfect way to meet the client’s needs. What follows are 10 planning ideas, with accompanying case studies, that illustrate the synergies created by private foundations utilizing community foundations. Community foundations, in this context, will extend to religious foundations, colleges and universities, healthcare institutions, national donor-advised funds or any nonprofit sponsoring donor-advised funds.
1. Five Percent Payout Solution
To meet the five percent payout requirement, many private foundations establish a community foundation fund (i.e., unrestricted, designated, field-of-interest, donor-advised or scholarship) and then make the appropriate qualifying distribution to it. In many cases, the community foundation may pay out the entire amount of the grant within the allowable period for an out of corpus distribution.
Flexible Grant Payout Management: The Brown Family Foundation had to make a year-end distribution in each of the last three years to meet the five percent payout. In the first year, time simply got away from them, but now the Browns want to be more thoughtful about their grants. In the second year, the underlying investments did much better than projected so the required payout was substantially more than what was planned at the beginning of the year. In the third year, they made a large challenge grant to a nonprofit. Unfortunately, the nonprofit notified the private foundation in December that they would not be able to meet the challenge requirements. In each of these situations, the private foundation made grants to an endowed scholarship fund focusing on “at-risk” youth. The fund was named “The Brown Family Foundation Scholarship Fund.”
2. Anonymity Planning
With the advent of scanning and web-based database technology, information is more available than ever. For those individuals or families who created private foundations decades ago, they were comforted that information, for the most part, remained private. Today, however, anyone with a computer can access Guidestar or the Foundation Center Library to gain information on any private foundation. Since all of the information is pulled from a foundation’s 990-PF (or in some instances the actual scanned 990-PF is available), anyone can see the asset balance, the directors, contact information, administrative fees paid, every grant that is made (organization name and amount), investment management fees (holdings are sometimes included), and trustee compensation. Investment advisors use this information to solicit new business and nonprofits use it to find potential matches for their programs. Unfortunately, clearly stating “This foundation does not respond to unsolicited applications” does not tend to work. Ironically, there really isn’t a less private charitable structure than a private foundation. Many philanthropists are “millionaires next door” and are not particularly interested in the limelight. Many are more inclined to give, or perhaps give more, when they can do so privately and using a community foundation can help meet this goal.
Keeping Grants Off the Radar: A family recently realized that their private foundation grant history was public information. They were especially sensitive to some controversial funding that they had planned for the upcoming year. Also, they now realized why they had started to receive so many new requests in the last five years. Each request cited a specific grant and dollar amount that the foundation had funded previously. To ease these concerns, their advisor suggested that they establish a donor-advised fund and flow any potentially controversial grants anonymously through the fund (a community foundation must file a 990 disclosing all grants; however, it does not have to disclose which donor-advised funds support each of the foundation’s grants). Further, their advisor suggested that they direct any unsolicited grant applications to their community foundation contact person by saying, “We do any discretionary giving through the community foundation.” The family told their contact at the community foundation to save only the grant applications which seemed to match the family’s interests.
Stretching Grantmaking Focus Outside the Public View: A very large private foundation had a very specific grantmaking focus: “to improve healthcare for our county.” They had received a number of requests in the past for environmental programs which all tweaked the application to highlight the healthcare benefits. The Board of the foundation, however, had denied all the grants because they were not clearly in the healthcare area. One of the Board members had heard about a statewide environmental project with an aim of identifying the primary environmental factors contributing to childcare asthma. Juvenile asthma rates in their county were the highest in the state. Additionally, the project leader happened to be a cousin of one of the Board members. The Board was worried that, if it approved the grant, other environmental groups would continue to apply the foundation. In addition, approving the grant would create ill will among environmental groups that had been denied previously, and would also suggest favoritism toward the Board member’s relative. They strongly believed, however, in the merits of the project. The Board established a donor-advised fund and requested that a grant be sent to the applicant with a cover letter stating: “the enclosed grant comes from an anonymous fund at The ABC Community Foundation.”
Looking Like a Hero Without Feeling Guilty: Andrea established a private foundation two years ago. At the time she started the private foundation, she accepted the role of capital campaign chair for her synagogue. Andrea was fully aware that she was expected to make a lead gift toward the campaign so her private foundation granted $100,000 -- ten times her typical annual synagogue gift of $10,000. She set a goal of completing the campaign within two years but the campaign is still about $100,000 short. Now at the tail end of the campaign, Andrea feels like she making twice the number of calls for half the results. Frankly, she is getting tired and wants to finish it out. She also wants the congregation to feel like they accomplished a stretch goal within the two-year time period. Andrea has more than enough capital within the private foundation and wants to make another $100,000 grant, but she is worried how it will look and, of most concern, she doesn’t want to feel guilty about going back to her $10,000 annual gift after she gives the synagogue $200,000. She plans to use her local Jewish Federation donor-advised fund to make an anonymous gift to accomplish all her objectives.
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