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L E A D I N G T A C T I C S F O R R U R A L F U N D D E V E L O P M E N T : H O W - T O S A N D T E M P L A T E S V E R S I O N 3 - 0 6

(Please note: This presentation is long. Please tailor it to meet your needs. If it is more appro- priate for your organization, substitute “community fund or community endowment” for “community foundation.”)

Why we’re here

n To help you help your clients with their planning and charitable interests n To introduce to you the flexibility and benefits of a community foundation n To tell you a few stories about how others have found the community foundation concept

useful

Do you know some of these people?

Mary Pettigrew — widow of James Pettigrew, she has been in the community only since they retired here about 10 years ago. She has become deeply involved with the local church and the local arts scene. She worries about her only daughter who is a successful single- mom career woman living far away, and doesn’t know what she should do about the estate plans that leave everything to the daughter and granddaughter, both of whom argue that they don’t need it and tell her that she should do whatever she wants with it. What sug- gestions can you make to help her? Mabel and Joseph Cargill — Joe has built a substantial business in the community. He is considered a leader and theirs is a high-profile family. Their kids are grown and gone and none is involved in the business. With his wife, Joe chairs all the big events in town and donates time and money generously to several organizations. He likes to be identified with new groups and activities, is strong-willed and opinionated, and has finally decided to sell the business that will undoubtedly bring somewhere in the low eight figures. He needs to review his estate and financial plans in preparation for this substantial financial event. How are you discussing charitable giving with them and what could the commu- nity foundation do to help them?

• Mr. and Mrs. Wingate — They have lived here all their lives and are very involved in com-

munity activities. They have lived comfortably but wouldn’t be known for their charitable giv-

• ing. They raised two children and are eagerly expecting their third grandchild, have attend-

ed a local church all their lives, and are facing the realization that they need to review the wills they made 30 years ago. Many of you have guided them through the years — in their

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L E A D I N G T A C T I C S F O R R U R A L F U N D D E V E L O P M E N T : H O W - T O S A N D T E M P L A T E S V E R S I O N 3 - 0 6

retirement account, their insurance policies, their plans for the kids’ education, and their modest investment portfolio. They love their children and grandkids but recognize that the kids are well-paid executives, so maybe they should be rethinking their wills that left every- thing to them. What do you say to them and how do you discuss their chari- table interests? Let’s take a look at the history of the community foundation movement. Maybe that will help put some of these questions into perspective. The first Community Foundation was started in 1914 by Frederick Goff, president

• f a Cleveland Bank. Why?

n He was holding charitable funds he couldn’t distribute because the donors had died and

their wills specified they must be used for specific community needs that no longer existed.

n Because he believed that everyone should have the opportunity that Carnegie,

Rockefeller, Ford and Mellon had—to make a big difference with their charitable giving.

n Because he knew the cost effectiveness of pooled funds. n Because he believed that wise people currently serving on the board of the bank could

help with this need to distribute the funds most appropriately to current charitable causes. The community foundation concept became popular and soon the foundations began to proliferate, especially in all the major cities of the nation. They were still not well known as entities, however, until the late 1960’s when: In 1969 Congress identified abuse in the field of philanthropy and determined to eliminate it.

n Congress determined that using your own tax-exempt foundation for personal gain was

inappropriate.

n Congress also found that public charities, in general, were not abusing their tax-free sta-

tus, so community foundations were no longer required to pay excise tax, they no longer had to have a minimum 5% payout and distribute it within a one-year period, and they could offer greater tax deductions and flexibility to accept certain types of gifts.

n This 1969 Tax Reform Act began the rush to form free-standing corporate community

foundations no longer attached to a bank. The early 1970’s saw the formation of many community foundations throughout the country, but primarily still in the larger cities.

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L E A D I N G T A C T I C S F O R R U R A L F U N D D E V E L O P M E N T : H O W - T O S A N D T E M P L A T E S V E R S I O N 3 - 0 6

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Suddenly, it seemed that everyone was eyeing the benefits of the community foundation business model. Just what made it so special? The four principles identified by Frederick Goff in 1914 are the same today and form the basis of the community foundation concept — essentially unchanged over all these years. These are:

n Community foundations have “cy pres,” (pronounced “sigh-pray”) or the variance power — the

ability to change the directions of the original donor if the cause is no longer necessary (if, say the donor’s funds were to go to combat a specific disease, and the disease has been eradicated); or if the foundation is incapable of following the directives of the donor (if, say, funds were to go to pay for schooling for young people interested in making buggy whips). Cy pres is not used often: in the case of polio, funds originally dedicated for that purpose would be diverted to the next closest cause, such as another muscular disease; funds for scholarships to learn to make buggy whips might be diverted to schol- arships for automobile mechanics. Nevertheless, cy pres avoids the cost and time of hav- ing to return to the court for permission to change the donor’s terms.

n Community foundations typically have modest to small minimum size requirements to

start donor-named funds, say $5,000–$10,000 on average (or sometimes less or none at all in rural places), so many individuals and families can have a fund in their name that lives forever — annually distributing funds to their favorite causes.

n Community foundations use the concept of pooling these small funds for efficient and

effective investment performance — you couldn’t have a private foundation for $5,000 or even $50,000 but you can have a named fund in a community foundation and work with your foundation to carry out your and your family’s dreams and charitable activities.

n Community foundations are governed by volunteers serving on the board and on numer-

• us committees. Board members typically are limited to a certain maximum number of

years of continuous service on the board, so there is a regular addition of new leadership and no control by a single family or individual. Volunteers also form the grant committee to help distribute the funds, the investment committee to determine the investment poli- cies and procedures and to hire and fire the professional money managers, and other committees to build the assets of the foundation. The scene today is quite different in several ways:

n There are now well over 650 community foundations throughout the United States — both

in large cities and in countless rural communities.

n There are community foundations starting around the world — in North America, Europe,

Africa, Asia, Australia and South America.

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n The old assumption that a community must have at least 250,000 people to support a

community foundation has long been shown to be inaccurate.

So how does the community foundation help you and your clients?

n It provides you with the most flexible charitable vehicle available.

n Because the community foundation has no single agenda — it works for the whole

community — it supports arts and culture, education, recreation, religious institutions, environment, health — anything you can name that is charitable.

n Because the community foundation can accept current gifts in almost any form, which

it then converts to cash and adds to the pool of endowments.

n Because the community foundation can accept estate and planned gifts — some of the

more mature and larger foundations even serve as trustee of charitable trusts.

n Because the donor ultimately has to decide how to direct his charitable gifts, but in the

meantime, you have only to name the foundation in the estate plan. You then can pre- pare the appropriate fund agreement form while your client contemplates how he feels about his favorite charitable causes.

n It provides staff at the foundation to help your clients.

n We know the community and its organizations. n As community foundations grow they add staff that can discuss ideas, guide tours of

• rganizations, or help create new projects for donors.

n We can handle all the work of required reporting and compliance and file all the

returns — your client and you don’t have to worry about these things.

n It allows your clients to be as involved as they want to be with their charitable giving.

n Your client may want to name a few favorite charities and assure that funds go there

every year, but have no involvement after the fund is established; or

n Your client may want to endow a fund which will make an annual contribution to his or

her religious institution in perpetuity; or

n Your client may want to continue a connection with organizations for which they have

worked or volunteered, and so they want to set up a designated fund; or

n Your client may have a favorite hometown organization he wants to support, many

years after having moved away.

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L E A D I N G T A C T I C S F O R R U R A L F U N D D E V E L O P M E N T : H O W - T O S A N D T E M P L A T E S V E R S I O N 3 - 0 6

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n Your client may want to identify a cause of particular interest, but not know exactly which

• rganizations to fund.

n Support for education is always popular, and far too many people think only of scholar-

ship funds — the foundation can establish a fund named after your client that benefits education but doesn’t limit it to scholarships — it might support an innovative program

• ne year, provide supplies for the local school another, enable teachers to have time
• ut of the classroom to increase their skills, or even build a new facility.

n Maybe they are interested in support for seniors, but don’t have a particular way to

identify what kind of program they could support — the foundation will research current programs and organizations, make suggestions, consider new ideas, and provide a liv- ing memorial to your client by making grants in his name forevermore.

n Your clients may live in a particular community within the geographic area of the

foundation, and want grants from their fund to be spent only in their hometown — here again, the foundation will identify opportunities in that community, will ask for propos- als from the community, or may convene a group from the area to discuss ideas and consider new options.

n Or maybe your clients want to help their community, but don’t know what the issues will

be in 50 or 100 years, and so want to leave the use of their funds up to the community foundation’s diverse board. These most generous gifts often come from those who really understand the constant of change and the benefit of maximum flexibility for the founda- tion to spend the earnings on their endowment for the most exciting and productive cur- rent opportunities. In each of these examples, there are numerous ways for your clients to be as involved in the process as they like — and they can be involved when they like.

n There are few rules on how the foundation operates with its donors — in fact, each donor

is a bit different.

n Each fund is defined through discussions with the donors to help them understand the

many options available.

n And many decide to start small and grow their funds as they build experience and under-

standing of the philanthropic process. The community foundation is the most cost-effective way to carry out charitable giving — except, perhaps, for those clients who have millions of dollars and prefer their own private foundation.

n Community foundations aim to become self-sufficient, so they aren’t fundraising every

year and actually competing with the organizations they are supposed to be supporting.

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n Self-sufficiency is achieved through an assessment on all the foundation’s funds — generally

at 1–2%.

n As the funds in the foundation grow, that assessment provides the annual operating

funds for the foundation office and staff — so you see, at $10 million, a foundation would earn $100,000 per year — an amount sufficient to run a modest office and provide ser- vices throughout the community.

n The foundation provides service to its donors, to nonprofits in the form of grantmaking,

workshops or training, and to the community in the form of convening and leadership.

n Usually three or four people can manage even a fairly large foundation as measured by

assets. The foundation pays professionals to manage the money.

n As they grow they add managers, diversifying the portfolio and seeking expertise in vari-

• us types of investments.

n We monitor the performance of these firms closely and make changes when performance

doesn’t meet our standards.

n The foundation’s investment committee is composed of knowledgeable individuals with

experience in investing, but is not composed of the managers themselves — that would be a conflict of interest!

Now, how does a community foundation work and how do we get started?

The simplest process to establish a fund is this:

n We will provide you with sample fund agreements. n There are several forms, all essentially identical but differing in the amount of involve-

ment your client desires.

n These are standard agreements and should not be altered, except to complete the sec-

tions necessary to define your clients’ wishes. Identify the asset to be used to establish the fund.

n Cash

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L E A D I N G T A C T I C S F O R R U R A L F U N D D E V E L O P M E N T : H O W - T O S A N D T E M P L A T E S V E R S I O N 3 - 0 6

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n Securities — beneficial to the donor in that the contribution avoids capital gains tax, pro-

vides the maximum deduction based on personal circumstances, gives full fair market value for the security, and can be handled electronically.

n Real property is possible, but does require a bit more due diligence. n Business interests are another interesting possibility, because through the foundation the

family business may change hands most favorably. We will provide this information to the foundation board of directors for approval at its next meeting.

n After you have determined there is charitable interest, it is always best for the donors

to have discussions with the foundation board or staff to gain a better understanding of how it operates.

n If confidentiality is an issue, operating anonymously is easily accomplished.

Estate gifts are processed in a similar manner.

n Most donors will define the gift in their plans and still want to sign a fund agreement to

ensure that they know the disposition of their gift when it goes to the foundation.

n Many who designate estate gifts also desire to establish their funds during their lifetime

so that there is an opportunity for the foundation to recognize their generosity and thank them!

n Charitable trusts and life income plans are more detailed, and should be discussed with

the foundation quite early in the process so that all the appropriate professionals are involved right from the start.

n Support materials are available from us and you should have a supply to provide your

clients when they have questions.

n Copies of foundation articles and bylaws n Tax exempt certification n A list of the board members, committee members and an annual report n Sample fund agreements

Thank you for being patient listeners! Now I’d like to hear from you. What are your questions or what challenges do you see to using the foundation? (Following are the typical questions you might expect. By knowing the answers to these ques- tions ahead of time you will be well prepared for any eventuality!)

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n Who pays the professional? n Who prepares the documents? n Can an individual broker manage funds for his client? n How do I know my client’s advice will be taken regarding distributions from his fund? n What if we want to make changes after a fund is established? n Who needs to be involved in setting up a fund? n Can family members be involved in a fund? n Can we draft specific provisions for how assets are to be distributed in a fund? n What happens if the community foundation goes out of business? n Who regulates or monitors a community foundation? n How do we know who future board members will be? n What prevents future board members from changing the foundation’s policies and opera-

tions?

n Who picks the board members? n Can donors serve on the board of a community foundation? n Can we have copies of investment policies? n Can we know who the money managers are and how they have done? n What does it cost to run the foundation? n How much of each fund actually goes to charity and how much to foundation overhead? n How does the foundation identify potential donors? n What involvement does the foundation want to have with my clients if they are prospects

for a fund?

Sample presentation to professional advisors