Managing Foundations and Charitable Trusts

Essential Knowledge, Tools, and Techniques for Donors and Advisors

Roger D. Silk, James W. Lintott

• Publisher: Bloomberg Press
• Year: 2011
• Print ISBN: 9781118038260
• eBook ISBN: 9781118093498
• Edition: 2
• Topic: Développement personnel
• Subtopic: Finances personnelles

The insider's guide to charitable organizations for donors and their advisors

Do you know when to use a private foundation, a donor-advised fund, or a charitable remainder trust or other charitable vehicle? Do you know the different tax benefits, limitations, and control rules for each alternative? Do you have an appropriate investment policy for your endowed charities? Do you have a rubric for avoiding fraud? Do you know what to look for to make sure that your charitable donations don't do the opposite of what you intend?

In Managing Foundations and Charitable Trusts, Roger D. Silk and James W. Lintott provide a comprehensive guide for charitable donors and their advisers. Additional topics include:

• Foundation Governance
• When to seek additional professional help
• When and how to turn a CRT interest into cash
• Key tax issues
• Creating a legacy
• Why tax planning is so difficult, and how to approach it

Straightforward and authoritative, Managing Foundations and Charitable Trusts is a handy, easy-to-read guide that all donors and their advisors will want to keep on hand.

Chapter 1

The Basics of Charitable Giving

You need no special knowledge to write a check to charity. But if you are a serious philanthropist, someone who wants to have an impact, to take advantage of tax breaks, and to exercise control, you need to know how the system works. Specifically, you need to know about the ways in which you can give to charity.

Charitable vehicles are legal structures that make effective charity possible. For people who are new to the world of philanthropy—and some who aren't so new—the range of charitable instruments can seem overwhelming. The first step in understanding them is to review all of the options with their advantages and disadvantages. In this chapter, we will look at four approaches to philanthropy: direct gifts, supporting organizations, donor-advised funds, and private foundations. We examine two other popular vehicles, charitable lead trusts and charitable remainder trusts, in greater detail in Chapter 4. Our aim is to provide a working overview of the available options so that donors and their advisers will be able to make choices appropriate for their specific situations.

Of course, we'll be focusing on the private foundation, the vehicle of choice for 75 percent of the country's wealthiest 400 families and truly the gold standard of charitable vehicles. However, to understand why private foundations work so well, it's important to know something about the other three approaches for a basis of comparison.

Direct Gifts

A direct gift of money is the simplest, easiest, and perhaps most familiar way to support a cause. Essentially, you write a check to the charity of your choice, and you're done. Large direct gifts are usually endowment gifts—money that will be held and invested by the charity or invested into bricks and mortar. Over time, the charity will spend the income generated by those assets. For example, anyone who's attended a class at any one of dozens of U.S. universities has probably seen the name “Kresge” on a hall or auditorium. “Kresge” is the “K” in “Kmart,” and the Kresge family has given large amounts to numerous schools, where the family name is now carved in stone. Kresge obviously favors using direct gifts as a means of supporting select charities and organizations. And for having buildings named after you, there's probably no better way to go.

But direct gifts often are not the best strategy for an effective long-term program. Here's why. Once a donor makes an endowment grant, he or she may have an opportunity to advise the board of the charitable organization, but will no longer have control over how the funds are used. Charities with large endowments—classic examples being Harvard University, with an endowment approaching $30 billion at last count, and Yale, with over $15 billion—are often less than responsive to the donors who created those endowments. Yale famously returned a $20 million gift from Texas billionaire Lee Bass, saying that Bass wanted too much control over how his money was used.

Unresponsiveness is no problem for donors who don't want a lot of involvement and are willing or even happy to give control over the money they have donated to the organization they've chosen. Many donors, though, especially those whose gifts are large, want to use their donations to create and implement a specific vision or to encourage a specific project. It is important for these donors to have control.

In the best cases, donors make large endowment gifts because they conclude that doing so will put the money to the best possible use. In many cases, however, donors may be interested in the publicity, the kudos, and the goodwill that attend the announcement of such gifts. The reader may recall Ted Turner's $1 billion pledge to the United Nations in 1997. It's hard to know what really went on in Turner's mind, but it's not unreasonable to believe that favorable publicity may have factored into his decision.

It can be very frustrating to make a large endowment gift only to watch the charity change its mission or act contrary to the donors’ wishes. Even having your name on the door does not guarantee that a charity will always do what you want. In 2000 in New York City, this was illustrated in an ugly and public battle between Marylou Whitney and the Whitney Museum over a work of art by Hans Haacke entitled Sanitation. Marylou Whitney, a daughter-in-law of Whitney Museum founder Gertrude Vanderbilt Whitney, was a director and member of the museum's national fund-raising committee. But when she and other family members raised objections to the planned exhibit because of the exhibit's appallingly insensitive use of Nazi iconography, the museum dismissed her concerns and proceeded to mount the show. Whitney resigned from the museum's fund-raising committee and removed the museum from her will. The Whitney was “free to associate itself with trash,” she told the BBC, but she did not want people to think she approved of it. Marylou Whitney also cancelled a planned $1 million gift to the Whitney Gallery of Western Art.

Another problem with large endowments is that they can make it feasible for the people running the charity to focus more on their own positions or on raising still more funds than on the immediate needs of the charity's beneficiaries. In our view, the actions of many large, privately endowed universities in the United States are a case in point. Schools such as Harvard, Stanford, and Princeton continue to aggressively seek new funds for their endowments, and continue to raise the pay levels of senior faculty and administration, even as they continue to raise tuition at rates far exceeding the rate of inflation, without using the endowment to moderate these costs. Some universities pay their presidents what many would consider to be astronomical salaries. For example, Rensselaer Polytechnic Institute, in Troy, New York, paid its president, Shirley-Ann Jackson, $1,598,247 in fiscal 2008 according to the New York Times. But she has company. The Times reported that 23 presidents of private universities earned more than $1 million in 2008.

Jon Van Til, a professor at Rutgers University, told the Chronicle of Philanthropy, seen by many as the newspaper of record for the philanthropic community, that such salaries often allow the people running the organizations to lose touch with the people they're supposed to be serving. James Abruzzo, who heads nonprofit headhunting for the New Jersey–based firm DHR International, draws the link explicitly. Many of the largest nonprofits tie executive pay to fund-raising success, he says.

Some cases of a charity actually violating a donor's intent are particularly blatant and egregious. If you haven't heard such stories, it's because they rarely reach the courts or show up in the press. Donors are too embarrassed to go public with their complaints. And even if the donors seem to have a good legal argument, it's difficult and expensive to meet the legally required standards of evidence on something as subjective as intent.

One case that did go to court involved Manhattan's St. Luke's Roosevelt hospital and a donor named R. Brinkley Smithers. Smithers dramatically influenced the treatment of alcoholism in the second half of the twentieth century. During the 1970s and 1980s, he pledged $10 million to St. Luke's Roosevelt in order to establish the Smithers Alcoholism and Treatment Center. Smithers was a strong supporter of an approach that encourages alcoholics to give up drinking entirely and to rely on group support from other alcoholics, the same approach pioneered by Alcoholics Anonymous. Smithers spent millions of dollars funding research on this form of treatment. He naturally expected the Smithers Alcoholism and Treatment Center to support his views on abstinence.

Smithers' theories were generally supported during his lifetime. But a year after he died, in 1994, St. Luke's developed an intervention clinic that accepted and supported a “controlled drinking” treatment. In addition, the hospital, heavily in debt, decided to sell the town house on Manhattan's Upper East Side that had housed the program for years. Smithers’ widow Adele sued St. Luke's, but she lost, and before she could get an appeals court ruling, St. Luke's sold the building for $15.9 million. Smithers and her son were so displeased with St. Luke's that they now publicly disavow the program that bears the family name. The trial court ruled that Mrs. Smithers lacked standing to sue. She appealed, and won. St. Luke's finally agreed to settle the case in 2003, by agreeing to give almost $6 million to another nonprofit, which is expected to carry out Brinkley Smithers’ original intentions.

As foundation managers, we've seen a number of similar cases up close, involving donors who felt mistreated and saw their money used in ways they'd never wanted. To protect our clients, we have removed identifying detail from these stories. But they are worth hearing.

In one case, during the 1970s, a well-known university raised $20 million from a prominent donor to finance research in a then-arcane area of finance called “derivative contracts’’ by a distinguished professor. When the university accepted the funds, it seemed to be in complete agreement with the donor's wishes that the money be spent on this particular area; the funds were put in a separate endowment account. Time passed, and the endowment grew. For a number of years, the research went on as intended.

But when the university changed hands in the 1990s, so did its priorities. The administration eliminated the entire research program and even the department for which the funds had been raised. A primary motive was to get their hands on the endowment funds. The donor had already died, but the finance professor, now retired, decided to fight. Over a period of several years, he expressed concerns quietly, and then made formal protests. He tried his best to gather allies against the administration, but he still hadn't made any headway when he died from a stroke in 1997. The assets were commingled with the endowment of the university.

In a second case, which also involves a university, a donor agreed to endow a chair for an economics professor. Endowed chairs, which establish a named professorship in a given field, are a staple of university fund-raising. They are created by universities as a fund-raising tactic, or by a donor who wants his or her name associated with a chair in exchange for funding. Perhaps the most famous is the Lucasian chair in mathematics at Cambridge University, now held by Stephen Hawking and once held by Sir Isaac Newton. That chair was created in 1663 by a gift of land from a Member of Parliament named Henry Lucas. The land yielded £100 a year, which was a lot of money in those days. These days, it costs a lot more than £100 a year to endow a chair. The price varies from school to school and even department to department, but it generally runs into six or seven figures. (The price may be negotiable, although this is a fact that schools would prefer remained secret.)

In our case of the economics chair, which occurred in the late 1990s, a wealthy donor who was already a supporter of a well-known eastern school decided to give an additional $1 million to endow a chair in economics. It was up to the university to make the appointment, and it chose one of the university's well-known professors. The professor was chosen partly because of work he had done to establish an important academic organization within the university—an organization that was endowed by the same generous donor who now wanted to endow the chair.

Receipt of a chair (which is always tenured) is both an honor and a sinecure for any professor, who has a public platform and cannot be fired. In this instance, the professor started a very public attack on an academic organization supported and funded by the same donor who had endowed the professor's chair. As a result, the organization's ideology changed dramatically, and in opposition to the donor's beliefs.

The donor was furious and extremely disappointed that his intentions for the organization and for the endowed chair had gone awry. There was nothing he or the university could do. He had no choice but to live with his mistake. But it is certain that he doesn't plan to endow another chair anytime soon. In all his future giving, the donor has been careful to attach strings and fund programs only a year at a time.

Stories like these are not unusual. We urge donors to weigh decisions carefully before making endowment grants to charities, whether these charities are universities, arts organizations, hospitals, or any other large institution. If donors have no doubt that a charity will be responsive to their wishes, or accept the idea that a charity should be free to modify its use of the funds as it thinks best, an endowment grant may be appropriate.

If you like the idea of your name carved in stone or on a plaque, and you believe in the mission of the organization and have confidence in its leadership, go ahead and make an endowment. You will be in a lot of good company. But if you want more control over the use of your money, we believe that there are better alternatives.

To encourage one-time endowment gifts, charities often tell donors that they need such gifts to ensure funding for long-term programs. In certain cases, this logic may be justified. But there are ways that a donor can arrange to provide long-term funding and still retain control. As we shall see later in this chapter, a private foundation is an ideal way to get the immediate tax benefits that come from an endowment-level gift, but still exercise the control and judgment you want (and that you believe can benefit the charities over the long run).

As you've seen, we are particularly cautious about universities. Even under the best of circumstances, in our view, universities are no longer good places to make big donations. Despite the popularity of university endowment funds, we do not usually advise large endowments for universities if a donor wants to have significant control over how that money is spent.

Supporting Organizations

Another charitable vehicle that can be appropriate in certain situations is a supporting organization. A supporting organization has some characteristics of a private foundation and some of a public charity. Like a private foundation, a supporting organization is a separate, freestanding legal entity. But it is often associated with a charitable organization that supplies it with certain services, such as money management and administration. The founder can often be on the board of the associated charity. However, unlike with a private foundation, the founder cannot have control. Control must rest with one or more public charities.

Recently a number of fund-raising organizations such as community foundations, universities, and Jewish federations have been marketing supporting organizations as “family foundations.” That creates some confusion, so it is worth examining these organizations in some depth.

For example, the Associated Jewish Charities in Baltimore, Maryland, in cooperation with Zanvyl Krieger, a very wealthy Baltimore businessman, created the Zanvyl Krieger Fund as a supporting organization in 1978. The Associated named Krieger and several of his family members, as well as a larger number of nonrelated people, to the board of the fund. For many years, until his death in the late 1990s, Krieger treated the fund much as he would have his private foundation. However, unlike with a foundation, Krieger had to take into account the desires of the Associated—the supporting organization—which at times conflicted with his own.

The rules describing supporting organizations are, not surprisingly, fairly complex. They are laid out in the Internal Revenue Code (IRC)'s Section 509(a)3. In essence, the rules state that a supporting organization must have a relationship with one or more public charities as follows. The supporting organization must be:

• Operated, supervised, or controlled by,
• Supervised or controlled in connection with, or
• Operated in connection with the principal organization.

In practice, “operated, supervised, or controlled by” means that the directors or officers of the supporting organization are selected...

Table of contents

• Cover
• Endorsement
• Series
• Title Page
• Copyright
• Dedication
• Preface
• Acknowledgements
• Chapter 1: The Basics of Charitable Giving
• Chapter 2: Tax Incentives and Limitations
• Chapter 3: Charitable Planning and Taxes
• Chapter 4: Planning with Charitable Lead Trusts and Charitable Remainder Trusts
• Chapter 5: Foundations and Children
• Chapter 6: Benefits of Giving While You're Still Alive
• Chapter 7: Effective Foundations: The Business of Philanthropy
• Chapter 8: The Road to Hell:1 Beware of Unintended Consequences
• Chapter 9: Developing an Appropriate Foundation Investment Policy
• Chapter 10: Developing and Implementing a Foundation Asset Allocation Policy
• Chapter 11: Main Themes in Legal Compliance
• Chapter 12: Fraud, Inflation, and Market Risk
• Chapter 13: Other Planned Giving Vehicles
• Chapter 14: Donor-Advised Funds
• Chapter 15: Building Assets with Charitable Planning
• Chapter 16: How to Select a Foundation Manager
• Chapter 17: What Can You Donate to Charity?
• Chapter 18: When the Shoe No Longer Fits
• Conclusion
• Selected Resources
• About the Authors
• Index