Family Foundations: Donor Advised Funds and Supporting Organizations as Alternatives to Private Foundations

Family Foundations: Donor Advised Funds and Supporting Organizations as Alternatives to Private Foundations

Article posted in Foundations on 14 July 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

Individuals with significant wealth frequently create family foundations to help organize their philanthropy. Historically, private nonoperating foundations have been the vehicle of choice in filling this role. In this week's edition of Gift Planner's Digest, Helen Monroe and Craig Wruck explore how donor advised funds and supporting organizations are being employed to help donors accomplish their charitable objectives.

by Craig Wruck and Helen Monroe

Family foundations have a strong appeal for generous individuals who wish to have an impact through charitable giving to an array of organizations over an extended period of time and for those who wish to provide family members and others with an opportunity to influence charitable giving now and in the future. Historically, private nonoperating foundations have been the vehicles of choice used to establish a family foundation, however there are other alternative methods to establishing a family foundation. A donor advised fund or a support organization can effectively function as a family foundation while offering much of the flexibility and appeal of a private family foundation without many of the regulations, requirements, and overhead expenses.

Donor Advised Funds

Donor advised funds are among the fastest growing techniques in personal philanthropy. Although donor advised funds are most often created through community foundations, other public charities are beginning to offer this vehicle to their donors as well.

Creating a Donor Advised Fund

Through a written agreement with a charity, a donor creates a specially named fund to which contributions are made. Depending on the terms and conditions of the agreement, the fund can be a permanent endowment from which the principal is not distributed, or a provisional fund that may distribute principal. The terms of the agreement provide the donor or others the privilege of making nonbinding recommendations regarding charitable distributions the charity makes from the fund. Exhibits B and C contain sample donor advised fund agreements, one for an endowment, and one for a pass-through or provisional fund. (Each individual public charity should have its own agreement drafted by legal counsel.)

Since the donor makes contributions directly to the charitable organization maintaining the fund, they are treated as charitable contributions to a public charity rather than gifts to a private foundation. Because the fund is an account of the charity (except for certain "trust" arrangements as explained below), it is not required to file separate tax returns or accountings, and is not subject to private foundation rules.

The key factor for the donor is that the continuing relationship to the fund is advisory only. Donors who want absolute control of the workings of their fund should not consider this alternative. Since a gift to charity must be "complete" to qualify as a charitable contribution for tax purposes, the donor's recommendations must be advisory only and the governing body of the fund must have control over all distributions.

Donor Advised Funds--When is a Gift Complete?

Charitable gifts are generally deductible only when the gift is completed and the donor has surrendered control of the gift. The gift is incomplete if the donor retains excessive control over the contributed property. Guidance as to how much control is too much can be found in the regulations governing "component funds" of a community trust or foundation.

Fund Accounts--Directly Held Funds: Most charitable organizations, and many community foundations, are organized as nonprofit corporations that administer their funds under fund accounting rules for nonprofit organizations. Thus, each fund represents an account on the books of the corporation. Even community foundations that hold most of their assets in separate trusts offer donors the opportunity to have funds administered as accounts instead. If a gift is made to a fund account of a nonprofit organization, the general principles that determine whether a donor has made a completed gift to a charity applies. However, it is reasonable to extend the standards that apply to component funds to fund accounts.

Whether funds held as accounts of a nonprofit corporation are subject to the same legal requirements as component funds is a subject of debate. Contributions to fund accounts owned by a nonprofit corporation are no different than other forms of charitable contributions. However, it might be argued that the specialized laws that apply to component funds also apply to fund accounts.

Component Funds--Trusts and Corporations: Some foundations consist of multiple trusts, each being administered as a separate trust. Bank trust departments often administer the investments of each trust fund, and an incorporated foundation directs the charitable grants. Banks that administer a fund in a custodial or agency account rather than in a separate trust are subject to the same rules.

Despite the fact the foundation does not have legal title to the assets, the trust is classified as part of the foundation (component fund) for federal tax purposes, if certain conditions are met. A component fund does not file a tax return, even if it is a separate trust or corporation. Instead, the foundation files a "consolidated" return that includes the financial transactions of all its funds. For a trust or corporation to be a component fund, certain requirements (Exhibit A) must be met.

Permissible Level of Donor Control--If the assets are in a component fund, regulations l.507-2(a)(8)(iv)(A) list several favorable and unfavorable factors to determine whether a donor has maintained too much control over a fund.

Adverse Factors--The presence of some, or all, of the following factors may indicate that too much donor control exists:

  • Solicitations imply foundation will follow donor's advice. The solicitations (written or oral) of the foundation state or imply (or a pattern of conduct on the part of the foundation creates an expectation) that the donor's advice will be followed.
  • Advice of the donor is limited to the fund the donor established. The advice of a donor is limited to distributions of amounts from the fund the donor established, and the independent investigation and guidelines for specific charitable needs are not present. Note: Arguably the word "and" means that this factor becomes unimportant if the guidelines have been adopted and investigations take place.
  • Only the advice of the donor is considered with respect to the fund. The foundation only solicits advice from the donor as to distributions from the fund that he or she established, and no procedure is provided for considering advice from persons other than the donor with respect to such fund.
  • Follows the donor's advice substantially all of the time. For the tax year, and all prior tax years, the foundation follows the advice of all donors with respect to their funds substantially all the time.

Favorable Factors--The presence of some, or all, of the following factors help demonstrate the absence of a disqualifying level of donor control:

  • Independent investigations. There has been an independent investigation by the foundation evaluating whether the donor's advice is consistent with specific charitable needs most deserving of the foundation's support.
  • Guidelines of specific charitable needs. The foundation has promulgated guidelines enumerating specific charitable needs that are consistent with its charitable purposes, and the donor's advice is consistent with such guidelines.
  • Education program. The foundation has instituted an education program publicizing to donors and other persons the guidelines that enumerate the specific charitable needs.
  • Foundation makes similar grants from other funds. The foundation distributes funds in excess of amounts distributed from the donor's fund to the same, or similar types of organizations, or charitable needs as those recommended by the donor.
  • Solicitations state there is no donor control. The foundation's written and oral solicitations for funds specifically state it will not be bound by advice offered by the donor.

Marketing Donor Advised Funds

Standards of operation of donor advised funds vary from organization to organization. There are distinct differences between community foundation donor advised funds and some other types of charities that offer donor advised funds. The IRS has expressed interest in reviewing issues such as commercial enterprises forming donor advised funds, as opposed to those operated by a charity, and the degree of donor control that is allowed.

Therefore, marketing for the donor advised fund should include several important elements. A set of suggested standards regarding donor involvement in donor advised funds that the community foundation field has drafted highlights four important areas of consideration. These are key to the way the fund is marketed as well as how it is operated by the charity.

Investments. It is suggested that a donor making a contribution to a donor advised fund be given a one-time opportunity to select a preliminary investment option from choices that are developed and controlled by the charity. Subsequently, the donor and family may not retain control or give specific instructions for the investments.

Donor Advice. It is absolutely essential that donors be informed that they have the privilege, from time to time, to make nonbinding recommendations for the timing, the amount, and the recipient of distributions from their advised fund. The donor does not retain any legal right to guarantee those directions. It is important that all oral and written communications from the charity to the donor throughout the solicitation and contribution process, as well as the operation of the advised fund, make this limitation very clear.

Obligations of the Charity. The charity is required to have identifiable and substantial charitable programs separate from the donor advised fund program. This would be accomplished and demonstrated by the establishment of unrestricted funds held by the charity from which grants are made in pursuit of a charitable program. It would also indicate the presence of a bona fide supervising board that actively reviewed the donors' advice. The charity should publicize the existence of its charitable program. In addition, it should provide a substantive education program for donors, such as reviews of charitable needs of the community, investigations of creative programs, and activities that will accomplish the goals of the donor advisors' charitable intent. It is also desirable that recommendations be directed from the charity to the donor, as well as from the donor to the charity.

Limits on Grantees. While many foundations vary in their application of limits on grantees, it is important that donor advised funds make grants to properly qualified organizations. The easiest distinction is to assure that all organizations are exempt under 501(c)(3), described in paragraphs 509(a) 1, 2, or 3 of the code. If the charity chooses to allow greater flexibility in the contributions, such as for a start up organization or a nonincorporated or exempt activity, it should still apply some rigorous scrutiny to guard against gifts being made for the benefit of the donor advisor. For example, no gift should be made to private nonoperating foundations, or to any organization that is controlled by the donor, any of his or her family members, or other agent of the donor. The charity should exercise due diligence and proper charitable expenditure review for gifts from a donor advised fund to an organization that is not exempt under 501(c)(3).

Comparison: Donor Advised Fund--Private Foundation



Comparisons Donor Advised Fund Private Foundation
Tax-exempt status. Shares public charity status with charity. Must establish separate tax exempt status as private foundation.
Charitable deduction for cash gifts. 50% of adjusted gross income in any one year. 30% of adjusted gross income in any one-year.
Charitable deduction for gifts of long-term capital gain property. Deduction for full fair market value, limited to 30% of adjusted gross income in any one year. Deduction for full fair market value, limited to 20% of adjusted gross income in any one year.
Donor control. Donor may be allowed to make recommendations as to investments and grants, but charity makes final decisions. Donor retains complete control over investments and grant making, limited only by IRS requirements.
Minimum payout requirements. None, except by charity's policy. Must pay out for charitable purposes at least 5% of asset value regardless of annual income.
Creating the foundation. Established by agreement with community foundation or other charity. Nonprofit corporation or trust organized as a private foundation.
Start-up costs. No cost to donor. Requires substantial legal, accounting, and operational costs similar to corporate startup.
Practical minimum size. Depends upon charity's policy, often $10,000 to $25,000. Substantial assets required, $1.0 million and up.
Administration and operations. Provided by the charity. Must establish, acquire, and manage on its own.
Annual costs. Minimal, usually set by charity on a break even basis. Can be costly including administration, accounting, and audit.
Annual taxes. None. Generally income tax exempt, but subject to excise tax of up to 2% of net investment gain including capital gains.
Annual tax filings and returns. None required, reported as part of the charity's annual reporting. Separate tax and information return must be filed with required schedules.
Investments. Provided by the charity, sometimes with donor's advice. Must establish, research, and mange own investment vehicles.
Fiduciary responsibility. Charity fulfills fiduciary responsibilities. Private foundation board has full fiduciary responsibility.
Liability and risk. Charity covers liability and risk. Must be provided by the foundation.


Supporting Organizations

A supporting organization is a 501(c)(3) charity that is classified as a public charity rather than a private foundation. This is because it "supports" a public charity such as a community foundation or other types of public charities. It is one of the few organizations that receive the benefits of public charity status for tax deductibility and operation without having to satisfy the public support test. A supporting organization can be classified as a public charity, even if there is only one donor, or one family of donors. The feeling is that the scrutiny that is provided by the public charity against which the supporting organization "leans" is enough public scrutiny to exempt it from the private foundation rules and regulations.

There are several practical considerations that would help a donor decide between a private foundation and a supporting organization:

  • The supporting organization is exempt from all private foundation excise tax and administrative requirements. This opens up many benefits to the donor who might want to use closely held stock or other assets prohibited in a private foundation.
  • A living donor receives the maximum tax benefit for contributions to a public charity.
  • There are great economies of scale through operating a supporting organization, especially in conjunction with a community foundation.

The Relationship Test

Of all the criteria that must apply to supporting organizations, the most crucial is how the supporting organization is related to the public charity because it determines how the supporting organization will operate. There are three basic categories of the relationship with rather complex legal implications for operation. The three basic relationships are best described as:

  1. Operated, supervised, or controlled by the public charity (supported organization).
  2. Supervised or controlled in connection with the public charity (supported organization).
  3. Operated in connection with the public charity (supported organization).


Of these three options, the third is by far the most complicated, and yet provides the most latitude for the donor desiring maximum control over the charitable activity. It is this type supporting organization that is most closely inspected and raises the most questions.

Why Would Donors Prefer Supporting Organizations to Advised Funds?

How do you determine whether a donor advised fund or a supporting organization is a better alternative? It might be helpful to compare the occasions where a donor would prefer a supporting organization to advised funds, with the occasions when a public charity prefers a supporting organization to an advised fund.

The supporting organization will give the donor a feeling of greater control. Because the support organization often has a separate identity and a certain degree of independence, donors have more of a sense of operating their own foundations. Grants are made separately from the supported organization and assets may be invested separately from the supported organization. This is probably the principal reason why donors choose a supporting organization over a component fund in a community foundation.

Donors may establish independent investment policies. Frequently a donor may have an investment philosophy that is different from the public charity. Those who feel strongly about equities versus bonds, or the degree of risk tolerance, may not be comfortable with policies of the supported organization. It is frequently the practice that the supporting organization may have its own investment committee with the supported organization exercising just general oversight.

The grant criteria may be different from those of the supported organization. Donors may choose to make larger or smaller grants, make them at different times of the year, define what is spendable differently, and the geographic area of interest could be considerably different. Frequently, the supporting organization permits this kind of flexibility that a donor advised fund might not.

Avoidance of other public charity rules. This election of a supporting organization may help a donor avoid some of the public charity's problematic policies. For example, a restriction on the number of generations that may act as advisors to the fund, which could be imposed by the supported organization on a component fund, would not apply to a supporting organization.

Why Would Public Charities Prefer Supporting Organizations to Advised Funds?

Substantial contributions and the public support test. The public charity is required to annually meet the public support test that defines its support as coming broadly from the public, with only a small percentage of large gifts counted toward that fraction. This works to the detriment of the public charity securing very large contributions. Therefore, substantial contributions are often placed in a supporting organization that exempts it from compliance with the public support test.

Nature of the assets to be held by the supporting organization. The public charity may not choose to hold the assets that a donor would like to contribute, such as real property, that it must manage and administer.

Activities or assets that might have potential liability. Again, the example of real estate might be a good one--where the property may be subject to lawsuit from a tenant or the city. Another example might be that special events, such as auctions, or golf tournaments would be held in support of raising money for an activity, or a fund, and would pose certain liability that the supported organization wants to avoid.

Maximizing the contribution to charity. The supporting organization can save taxes, if for example, the donor contributes all of the stock of a closely held corporation that has low basis assets. A good example might be real estate where the corporation has no way to avoid payment on high appreciation in the real property when it sells it, other than to place the assets within the public charity structure.

A way to avoid unrelated business income tax (UBIT). Although a tax-exempt charity does not usually have any income tax liability from the receipt of interest income, a charity will have unrelated taxable income if it receives interest income from a corporation that it controls. A controlled corporation exists if a charity holds at least 80% of the voting and nonvoting stock of the for-profit corporation. The public charity, therefore, may want those assets in a supporting organization.

Conclusion

For a wide variety of reasons donors and their families are attracted to the notion of creating a family foundation. Most often a private nonoperating foundation is the way in which a family foundation is created. However, for donors who are willing to settle for an advisory only relationship, a donor advised fund with a community foundation or other public charity can provide a low cost and simple way to create a family foundation. For donors who wish to exercise a significant degree of influence, rather than having a merely advisory relationship, but who are willing to surrender control, a supporting organization may be a good choice. And, of course, for those donors who wish to maintain control, a private foundation may be the best choice. By offering a full range of options, the gift planner can allow donors a number of ways to create a family foundation to fulfill their clients' charitable goals.


Exhibit A

Component Fund Rules For a trust or corporation to be considered a component fund, the following requirements must be met:

  • The organizational documents of the community foundation or public charity must meet the "single entity" regulations.
  • The trust or corporation must subject itself to the common governing instrument of the community foundation.
  • The community foundation or public charity must accept the contribution (a standard requirement for all charitable gifts).
  • The donor must not have directly or indirectly subjected the fund to a "material restriction" with respect to the transferred assets. A material restriction is a restriction, or condition, that prevents a community foundation or public charity from "freely and effectively employing the transferred assets, or the income derived therefrom, in furtherance of its exempt purposes." This is essentially a test to determine whether a donor has made a completed gift to the foundation or charity, but it also contains provisions that are similar to those that determine whether a terminating private foundation has transferred "all of its right, title, and interest in and to all of its net assets" to a public charity. Some of the material restrictions that must be avoided are:
    1. restrictions concerning distributions including control of the selection of charitable
      beneficiaries, or control of the timing of distributions;
    2. restrictions concerning contributed property, such as required retention of investment assets or a right of first refusal;
    3. assumption of donor leases, contracts, and pledges; or,
    4. certain relationships with investment advisors.
Single-Entity Regulations

Regulations 1.170A-9(e)(11) provide that multiple trusts and corporations are treated, for tax purposes, as a single community foundation if the organizational documents (trust instrument, articles of incorporation, or bylaws) of the foundation contain certain provisions. The single-entity requirements, generally require the community foundation to monitor the investment performance of every trustee, and to replace a trustee for a breach of fiduciary duty, or an inadequate investment return. They also permit the community foundation to change a donor's restrictions on the charitable use of a fund if circumstances have sufficiently changed to make the restriction unnecessary (similar to the judicial doctrines of cy pres and equitable deviation). Most community foundations, even those that currently operate only in the corporate form with fund accounts, have organizational documents that meet the single-entity tax regulations. The single-entity requirements are:

  • The organization must be commonly known as a "community foundation," "community trust" or "community fund."
  • All component funds of the community foundation must subject themselves to a common governing instrument (usually, a reference to the articles of incorporation of the community foundation is sufficient).
  • The community foundation must have a common governing body (usually this is the directors or trustees of the community foundation).
  • The body must have and exercise these powers over the fund.
  • To modify any restriction or condition on the distribution of funds for any specified charitable purpose, or to any specified organization, if such restriction or condition becomes unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served.
  • To replace any participating trustee, custodian, or agent for breach of fiduciary duty under state law.
  • To replace any participating trustee, custodian, or agent for failure to produce a reasonable return of net income over a reasonable period of time.
  • The governing body must see that each participating trustee, custodian, or agent administers the trust or fund in accordance with the terms of its governing instrument and accepted standards of fiduciary conduct to produce a reasonable return of net income.
  • The community foundation must prepare periodic financial reports that treat all the funds it holds, either directly or in component parts, as funds of the organization.

Exhibit B

ADVISED ENDOWMENT FUND AGREEMENT
BETWEEN ___________________________
AND ________________________________
THIS AGREEMENT, made and entered into on , ____, by and between _________________________ ("Foundation"), and ____________________ ("Donor").

WITNESSETH:

WHEREAS, the Donor desires to have established in the Foundation an advised endowment fund designated ____________________with respect to which the Donor can recommend recipients of charitable grants; and

WHEREAS, the Foundation is a nonprofit ________ corporation, exempt from taxation under Internal Revenue Code (Code) section 501(c)(3), a public charity described in section 170(b)(1)(A)(vi) of the Code, and accordingly an appropriate institution within which to establish such a charitable endowment; and

WHEREAS, the Foundation is willing and able to create such an endowment as an Advised Endowment Fund, subject to the terms and conditions hereof;

NOW THEREFORE, the parties agree as follows;

  1. GIFT AND NAME OF THE FUND. Donor hereby transfers irrevocably to the Foundation the property described in the attached Exhibit A to establish in the Foundation an advised endowment fund designated as the ___________ Fund. Subject of the right of the Foundation to reject any particular gift, the Foundation may receive additional irrevocable gifts of property acceptable to the Foundation from time to time from Donor, and from any other source to be added to the Fund, all subject to the provisions hereof. All grants, bequests, and devises to this Fund shall be irrevocable once accepted by the Foundation.
  2. PURPOSE. The primary purpose of the Fund shall be to provide support as directed by the Board of Directors (the Board) for [a charitable or other exempt purpose (within the meaning of Code section 170(c)(1) or (2)(B)) that is consistent with the exempt purposes of the Foundation] [for general charitable purposes.]
  3. DISTRIBUTION. The annual earnings allocable to the Fund, net of the fees and expenses set forth in paragraph 11, may be committed, granted, or expended only for purposes described in Code section 170(c)(l) or (2)(B); provided, however, that such purposes are consistent with the exempt status and purposes of the Foundation. Neither the Fund principal nor the net appreciation of fund principal, realized or unrealized, may be committed, granted, or expended. If any gifts to the Foundation for the purposes of the Fund are received and accepted subject to a Donor's conditions or restrictions as to the use of the gift or income therefrom, said conditions or restrictions will be honored, subject, however, to the authority of the Foundation's Board to vary the terms of any gift, if continued adherence to any condition or restriction is in the judgment of the Foundation's Board unnecessarily, incapable of fulfillment, or inconsistent with the charitable or other exempt purposes of the Foundation, or needs of the community served by the Foundation. No distribution shall be made from the Fund to any individual or entity if such distribution will in the judgment of the Foundation, endanger the Foundation's Code section 501(c)(3) status.
  4. RECOMMENDATIONS FOR DISTRIBUTION. Subject to the Foundation's principles and procedures for advised funds, the commitments, grants, or expenditures from the Fund contemplated in paragraph 3 shall be made at such time, or times, and in such amount, or amounts, as may be determined solely by the Foundation for such purposes described in paragraph 3 as may be designated by the Foundation provided, however, that Donor may from time to time submit to the Foundation the specific charitable, or other exempt purposes, or the names of specified organizations or individuals for, or to which, is recommended that distributions be made. All recommendations from Donor shall be solely advisory, and the Foundation may accept or reject them, applying reasonable standards and guidelines with regard thereto. If Donor is married, and Donor's spouse does not desire to serve as an advisor, Donor's spouse is requested (but not required) to sign a Spousal Consent as an addendum to this Agreement. If both spouses sign this Agreement as Donor each shall equally advice as to Fund distribution. After the death of Donor, or the survivor of Donor, and Donor's spouse, as appropriate, the Board of the Foundation shall itself serve as the advisor of the Fund.
  5. ADMINISTRATIVE PROVISIONS. Notwithstanding anything herein to the contrary, the Foundation shall hold the Fund, and all contributions to the Fund, subject to the provisions of the applicable ________ laws and the Foundation's Articles of Incorporation and Bylaws. The Board shall direct or monitor the distribution of the Fund to ensure it is used exclusively for charitable or other exempt purposes within the meaning of Code section 170(c)(l) or (2)(B), and shall have all powers of modification and removal specified in United States Treasury; Regulations Section 1.170A-9(e)(11)(v)(B).
  6. The Board agrees to provide the Donor a copy of the annual examination of the finances of the Foundation as reported upon by independent certified public accountants.
  7. CONDITIONS FOR ACCEPTANCE OF FUNDS. The Donor agrees and acknowledges that the establishment of the Fund herein created is made in recognition of, and subject to, the terms and conditions of the Articles of Incorporation and Bylaws of the Foundation, as from time to time amended, and that the Fund shall at all times be subject to such terms and conditions, including, but not by way of limitation, provisions for:
    1. presumption of donors intent;
    2. variance from donors direction;
    3. amendments.
  8. CONTINUITY OF THE FUND. The fund shall continue so long as assets are available in the Fund and the purposes in the Fund can be served by its continuation. If the Fund is terminated, the Foundation shall devote any remaining assets in the Fund exclusively for charitable or other exempt purposes that:
    1. are within the scope of the charitable or other exempt purposes of the Foundation's Articles of Incorporation; and,
    2. most nearly approximate, in the good faith opinion of the Board, the original purpose of the Fund.
  9. NOT A SEPARATE TRUST. The Fund shall be a component part of the Foundation. All money and property in the Fund shall be held as general assets of the Foundation and not segregated as trust property of a separate trust, provided that for purposes of determining the share of the Foundation's earnings allocable to the Fund, and the value of the principal of the Fund, the interest of the Fund in the general assets of the Foundation shall be a percentage determined by dividing the gift to the Fund by the then value of the total assets of the Foundation, such percentage interest being subject to adjustment at the time of each addition to, or reduction of the assets of the Foundation.
  10. ACCOUNTING. The receipts and disbursements of this Fund shall be accounted for separately and apart from those of other gifts to the Foundation.
  11. INVESTMENT OF FUNDS. The Foundation shall have all powers necessary, or in its sole discretion desirable, to carry out the purposes of the Fund, including, but not limited to, the power to retain, invest, and reinvest the Fund and the power to commingle the assets of the Fund with those of other funds for investment purposes.
  12. COSTS OF THE FUND. It is understood and agreed that the Fund shall share a fair portion of the total investment and administrative costs of the Foundation. Those costs annually charged against the Fund shall be determined in accordance with the then current fee schedule identified by the Foundation as applicable to funds of this type. Any costs to the Foundation in accepting, transferring, or managing property donated to the Foundation for the Fund shall also be paid from the Fund.

12) IN WITNESS WHEREOF, the Donor has executed this Agreement, and the Foundation has caused this Agreement to be approved by its Board, and to be executed by a duly authorized officer, all as of the day and year first above written, ____________________________
Donor ____________________________
Donor

Approved by the Board of Directors of ______________________ , on ______.

Foundation
____________________________

By__________________________
President

This is a sample only of a donor advised fund agreement for an endowment fund. Each individual public charity should have its own agreements drafted by legal counsel.


Exhibit C

ADVISED PASS-THROUGH FUND AGREEMENT
BETWEEN ___________________________
AND ________________________________

THIS AGREEMENT, made and entered into on , ____, by and between _________________________ ("Foundation"), and ____________________("Donor").

WITNESSETH:

WHEREAS, the Donor desires to have established in the Foundation an advised pass-through fund designated ________________________ with respect to which the Donor can recommend recipients of charitable grants; and

WHEREAS the Foundation is a nonprofit ________ corporation exempt from taxation under Internal Revenue Code (Code) section 50l(c)(3), a public charity described in section 170(b)(1)(A)(vi) of the Code and accordingly an appropriate institution within which to establish such a charitable endowment; and

WHEREAS, the Foundation is willing and able to create such a fund, subject to the terms and conditions hereof;

NOW THEREFORE, the parties agree as follows:

  1. GIFT AND NAME OF THE FUND. Donor hereby transfers irrevocably to the Foundation the property described in the attached Exhibit A to establish in the Foundation the _____________ Fund. Subject of the right of the Foundation to reject any particular gift, the Foundation may receive additional irrevocable gifts of property acceptable to the Foundation from time to time from Donor and from any other source to be added to the Fund, all subject to the provisions hereof. All grants, bequests, and devises to this Fund shall be irrevocable once accepted by the Foundation,
  2. PURPOSE. The primary purpose of the Fund shall be to provide support as directed by the Board of Directors (the Board) for [a purpose within the meaning of Code section 170(c)(1) or (2)(B)) that is consistent with the exempt purposes of the Foundation] [or general charitable purposes.]
  3. DISTRIBUTION. The annual earnings allocable to the Fund, net of the fees and expenses set forth in paragraph 11, and principal, to the extent expressly permitted by this Agreement or the gift instrument, may be committed, granted, or expended only for purposes described in Code section 170(c)(1) or (2)(B); provided, however, that such purposes are consistent with the exempt status and purposes of the Foundation. If any gifts to the Foundation for the purposes of the Fund are received and accepted subject to a Donor's conditions or restrictions as to the use of the gift or income therefrom, said conditions or restrictions will be honored, subject however, to the authority of the Foundation's Board to vary the terms of any gift if continued adherence to any condition or restriction is in the judgment of the Foundation's Board unnecessary, incapable of fulfillment, or inconsistent with the charitable or other exempt purposes of the Foundation, or needs of the community served by the Foundation. No distribution shall be made from the Fund to any individual or entity if such distribution will, in the judgment of the Foundation, endanger the Foundation's Code section 501(c)(3) status.
  4. RECOMMENDATIONS FOR DISTRIBUTION. Subject to the Foundation's principles and procedures for advised funds, the commitments, grants, or expenditures from the Fund contemplated in paragraph 3 shall be made at such time, or times, and in such amount or amounts as may be determined solely by the Foundation for such purposes described in paragraph 3 as may be designated by the Foundation provided, however, that Donor may from time to time submit to the Foundation the specific charitable, or other exempt purposes or the names of specified organizations or individuals for or to which is recommended that distributions be made. All recommendations from Donor shall be solely advisory, and the Foundation may accept or reject them, applying reasonable standards and guidelines with regard thereto. If Donor is married and Donor's spouse does not desire to serve as an advisor, Donor's spouse is requested (but not required) to sign a Spousal Consent as an addendum to this Agreement. If both spouses sign this Agreement as Donor, each shall equally advice as to Fund distribution. After the death of Donor, or the survivor of Donor, and Donor's spouse, as appropriate, the Board of the Foundation shall itself serve as the advisor of the Fund.
  5. ADMINISTRATIVE PROVISIONS. Notwithstanding anything herein to the contrary, the Foundation shall hold the Fund, and all contributions to the Fund, subject to the provisions of the applicable _______ laws and the Foundation's Articles of Incorporation and Bylaws. The Board shall direct or monitor the distribution of the Fund to ensure it is used exclusively for charitable or other exempt purposes within the meaning of Code section 170(c)(1) or (2)(B), and shall have all powers of modification and removal specified in United States Treasury Regulations Section 1.170A-9(e)(11)(v)(B).

    The Board agrees to provide the Donor a copy of the annual examination of the finances of the Foundation as reported upon by independent certified public accountants.
  6. CONDITIONS FOR ACCEPTANCE OF FUNDS. The Donor agrees and acknowledges that the establishment of the Fund herein created is made in recognition of, and subject to, the terms and conditions of the Articles of Incorporation and Bylaws of the Foundation, as from time to time amended, and that the Fund shall at all times be subject to such terms and conditions, including, but not by way of limitation, provisions for:
    1. presumption of donors intent;
    2. variance from donors direction;
    3. amendments.
  7. CONTINUITY OF THE FUND. The fund shall continue so long as assets are available in the Fund and the purposes in the Fund can be served by its continuation. If the Fund is terminated, the Foundation shall devote any remaining assets in the Fund exclusively for charitable or other exempt purposes that:
    1. are within the scope of the charitable or other exempt purposes of the Foundation's Articles of Incorporation; and,
    2. most nearly approximate, in the good faith opinion of the Board, the original purpose of the Fund.
  8. NOT A SEPARATE TRUST. The Fund shall be a component part of the Foundation. All money and property in the Fund shall be held as general assets of the Foundation and not segregated as trust property of a separate trust; provided that for purposes of determining the share of the Foundation's earnings allocable to the Fund and the value of the principal of the Fund, the interest of the Fund in the general assets of the Foundation shall be a percentage determined by dividing the gift to the Fund by the then value of the total assets of the Foundation, such percentage interest being subject to adjustment at the time of each addition to or reduction of the assets of the Foundation.
  9. ACCOUNTING. The receipts and disbursements of this Fund shall be accounted for separately and apart from those of other gifts to the Foundation.
  10. INVESTMENT OF FUNDS. The Foundation shall have all powers necessary, or in its sole discretion desirable, to carry out the purposes of the Fund, including, but not limited to, the power to retain, invest, and reinvest the Fund, and the power to commingle the assets of the Fund 'with those of other funds for investment purposes.
  11. COSTS OF THE FUND. It is understood and agreed that the Fund shall share a fair portion of the total investment and administrative costs of the Foundation. Those costs annually charged against the Fund shall be determined in accordance with the then current fee schedule identified by the Foundation as applicable to funds of this type. Any costs to the Foundation in accepting, transferring, or managing property donated to the Foundation for the Fund shall also be paid from the Fund.

IN WITNESS WHEREOF, the Donor has executed this Agreement ,and the Foundation has caused this Agreement to be approved by its Board, and to be executed by a duly authorized officer, all as of the day and year first above written.

____________________________
Donor

____________________________
Donor

Approved by the Board of Directors of ______________________ , on ______.

Foundation
____________________________

By__________________________
President

This is a sample only of an advised pass-through fund agreement. Each individual public charity should have its own agreements drafted by legal counsel.

Significant portions of this outline were adapted from Tax Economics of Charitable Giving, Twelfth Edition, May 1995, Arthur Andersen, 800-546-3209

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