Winter 1992-1993 Philanthropic Fund: A Simpler Alternative to the Private Foundation
Suppose a client wishes to set aside a sizable sum (let's say $20,000) for certain charitable purposes. The client would like to have ongoing input into how the fund monies are applied to these purposes. The client could achieve these objectives by forming a private foundation, but the amount involved does not justify the expense involved. Furthermore, the client is reluctant to assume the administrative responsibilities inherent in the operation of a private foundation, This client should be encouraged to create a "philanthropic fund". Such a fund can free the client from the administrative entanglements of a private foundation. At the same time, the client can make regular recommendations concerning the distribution of the fund. In many cases, the philanthropic fund presents the "best of both worlds" alternative which will appeal to may charitably inclined clients.
The Philanthropic Fund
Many public charities have procedures whereby contributions can be held in separately designated philanthropic funds. Each fund bears the contributor's name (or another name designated by the contributor). The fund is usually collectively invested with the charity' s other philanthropic funds, and is credited with its share of the collective earnings.
Consistent with applicable Treasury Regulations, it is the charity rather than the contributor which makes the ultimate determination on any distribution. However, the administering charity will consider the contributor's recommendations on an ongoing basis, concerning the qualified charities which are to receive distributions from the fund.
Typically, all of the administrative costs connected with the establishment and administration of the fund are borne by the administering charity. Since the fund is considered to be a component part of the public charity for income tax purposes, a gift to a philanthropic fund is not subject to the charitable deduction limitations applicable to a contribution to a private foundation.
Additional Advantages of the Philanthropic Fund
The philanthropic fund offers the following additional advantages over the private foundation:
- Private foundations must be carefully monitored by donors and their professional advisors in order to minimize their exposure to a number of potentially costly excise taxes. Philanthropic funds are not subject to these excise taxes, including the tax on net investment income imposed on private foundations. The fund can typically be established simply by delivering the contribution to the administering charity and designating the name of the fund. A private foundation, in contrast, must be either a corporation or a trust, and requires an organizational document (a certificate of incorporation and bylaws, or a trust document).
- A private foundation must apply to the IRS for a determination confirming its tax-exempt status. A philanthropic fund, since it is administered through a public charity that has already been determined to have tax exempt status, need not obtain a separate determination.
- Investment, legal and accounting advice is needed on a regular basis in order to effectively administer the assets of a private foundation in compliance with applicable state laws as well as federal tax rules. With a philanthropic fund, this professional advice is normally provided by the administering charity. Administering charities often charge a management fee, but this fee is generally significantly less than the expense entailed in administering a private foundation.
Somewhat similar to a private foundation, a philanthropic fund cannot accumulate its income. Undistributed income will become the property of the administering charity. Income can, however, be accumulated for certain limited purposes of charitable campaigns. Notwithstanding its many advantages, the creation of a philanthropic fund is not indicated in all situations. If the amounts involved are very significant and the donor envisions his or her family's perpetual participation in the administration of the gift, or if the donor has relatively narrow charitable purposes which he or she desires to serve in perpetuity, a private foundation or a special public foundation called a supporting foundation (see I.R.C. Sec. 509 (a) (3)) may be more appropriate vehicles. Donors should keep in mind that families, and the relative urgency of various charitable goals, change with the generations, and the control and restrictiveness of purpose available with a private foundation may ultimately prove disadvantageous.
Establishing a Philanthropic Fund Through the JCF
A philanthropic fund can be established through the Jewish Community Foundation of MetroWest by making a minimum contribution of $10,000. The Foundation assumes responsibility for all aspects of administration of the fund. The fund bears the donor's name or a name or names designated by the donor. The donor also designates those individuals who will make recommendations concerning the distribution of the fund. Often these individuals will include the donor's spouse, and after both are deceased, the donor's children. The Foundation reviews these recommendations monthly. Subject to the approval of the Foundation's trustees, distributions will be made accordingly. Among the recommendations the trustees will typically approve are distributions to the United Jewish Appeal, to beneficiary agencies of the United Jewish Federation of MetroWest, to recognized Jewish organizations, and to secular public charities which can be accessed by or participated in by Jews.
The donor, and others, may make additional contributions to the fund as desired. Payments from the fund to the selected charities will include the acknowledgement that the payment is being made from the fund pursuant to the donor's (or selected other's) recommendation. The Foundation provides the donor with quarterly reports of the operation of the fund.
Upon the death of the last individual designated to make recommendations concerning the fund, the fund will become part of the general fund of the Foundation, to be applied to its general charitable purposes.
Any individual wishing to establish a philanthropic fund through the Foundation should contact Richard Slutzky, J.D., Director, Jewish Community Foundation of MetroWest, for additional information (201-884-4800, Ext. 195).