Financial and Tax Professionals
News
10/1/98
The American Foundation’s Declaration of Support for Increased Donor Involvement in Charitable Development
PHOENIX, Arizona - October 1, 1998
Preface: The presentation of this declaration comes at a critical time in the development of philanthropy. The direction of the issues presented here will have enormous influence on social development and the eventual success of humanity (assuming that caring for others is basic to man's long-term successful existence). The central issue is whether we needlessly limit and restrict individual, family, and business involvement in charitable funding and charitable direction or do we provide encouragement and incentives to get the private sector even more involved?
The American Foundation strongly promotes and supports increased individual, family and corporate donor involvement in every kind of philanthropy.
Donor Advised Funds. Of primary concern is the current debate raging over the degree of donor control, direction, or involvement in "donor advised" funds or accounts. These kinds of accounts are currently being established in several different formats and settings, including:
There has been a dramatic increase in the numbers of each of these kinds of accounts.
The American Foundation feels this is a positive trend with enormous ramifications for worldwide good.
Community Foundations led the way. The popularity and attraction first started with the Community Foundations' "donor advised" funds, which, according to many professionals, accounted for the phenomenal growth of Community Foundations themselves, over the past 15 years.
The attraction was simple: more individual or donor involvement.
Following this lead, and just within the past few years, numerous public charities and commercial institutions have extended this phenomenon to even greater heights. They have been establishing new donor advised gift accounts in large numbers. These accounts reflect even more donor involvement or participation (not control) than what is typically offered by community foundations.
Community Foundations are now crying foul play. Up until now, community foundations have been following the more restrictive Section 507 guidelines in their administration of "donor advised" accounts. The IRS regulations concerning this code section are interpreted as being more limiting on donor involvement.
Section 507 was originally enacted solely to govern terminating private foundations that conveyed their funds over to a public charity. These rules prohibit any "substantial or material" restrictions on such a fund. The regulations set forth a whole list of facts and circumstances to help define what is "substantial or material" restriction. Most Community Foundations have extended these rules, rightly or wrongly, to newly established "donor advised" funds where the donor can make only non-binding recommendations to the community foundation or other public charity about possible grant recipients or investments.
The community trust regulations (Reg. Section 1.170A-9(e)(11)) enabled the relatively few community foundations in trust form with many trusts held by banks as trustees to meet the "single entity" test, with each fund being defined as a "component part." The regulations then made a cross reference to the Section 507 regulations, making it clear that no "substantial or material" restriction may be placed on these funds by the donor (Reg. Section 1.507-2(a)(8)).
Therefore, the following question has risen to the forefront: Should this same test, "substantial or material restriction," also apply to the commercially sponsored and other public charity "donor advised" or otherwise donor directed accounts? Or the question that is even more basic and at the heart of the issue: should the definition of "substantial or material restriction" even include limiting donor involvement, such as giving ongoing charitable direction?
Most professionals, who think the answer is yes, erroneously support the notion that we need to maintain a real distinction (more than mere ownership or control) between Private Foundations and Public Charities.
The American Foundation believes the Private Foundation Legislation of 1969 was bad law.
In 1969, Congress enacted Private Foundation legislation, in part to correct actual and potential abuses of donor involvement in philanthropy. This legislation, with its complex and limiting regulations on private foundations, had the result of sharply curtailing their growth. The critics claimed then, as they do now, that more donor involvement brings with it more abuse. In the broader perspective this is not true; but, because of this notion, Congress, in 1969, overreacted. They didn't understand that most abuses could be corrected without destroying the incentive for people to establish charitable foundations. They enacted private foundation regulations that were burdensome, complex, and in general too limiting. As a result, this law brought a screeching halt to any meaningful growth of private foundations. We think this was a tragedy. In essence, "the baby was thrown out with the bath water."
There has never been a plausible explanation for restricting donor involvement in the charitable aspects of giving. Legitimate donor involvement benefits everyone. By "charitable aspects of giving" we mean activities such as volunteering to assist in charitable projects, or giving recommendations on how a charity's funds are expended to achieve intended charitable purposes. This type of involvement should be encouraged and promoted, even in the law.Of course, there should be distinctions between helpful involvement and not so helpful or "suspect" involvement, with the charities (and the IRS) having oversight and corrective responsibility. For example:
Positive Involvement
Mr. Smith, with a "donor advised" fund at a Community Foundation recommends financial support to charities X, Y, and Z. The Community Foundation verifies that charities X, Y, and Z are qualifying 501(c)(3) Public Charities and determines that the financial aid is reasonably expected to help these charities achieve worthwhile charitable objectives. The Community Foundation then requires a report or accounting from these charities on their use of the funds. Allowing Mr. Smith charitable direction in a "donor advised" fund, when it is unequivocally owned and controlled by a responsible Community Foundation or Public Charity, is "good" donor involvement. This combined effort of donor direction and Community Foundation oversight will prevent abuses.
Negative Involvement
The American Foundation is a strong proponent of protecting charity from abuses. We support legislation that severely punishes those who take advantage of charitable laws and receive tax benefits from gift plans that have little or no charitable substance.
One type of abuse is called "self dealing." An example of self dealing occurs when a donor persuades a charitable organization to compensate the donor's for-profit business for performing bogus work for the charity. This is, and should continue to be subject to sanctions. Under current law, the charity and individual in this case would be subject to significant penalties including termination of charitable status.
Negative involvement should be sharply discouraged, and positive involvement should be encouraged-even championed.
A New and Better Alternative
We need to now look beyond the 1969 Private Foundation Laws, and focus on doing what will best unleash vast amounts of new philanthropy. Increased donor involvement and direction over charitable funds owned and controlled by public charities seems to be the perfect solution.
This combination (donor participation coupled with charity ownership) is starting to work, so now let's let this development continue to mushroom, as we think it certainly can. The result will be a much better world for us and our children to live in.
Alert! Proposed legislation to limit donor involvement. There are current efforts being made to curtail, or impede the above-described new and progressive trend of increased individual involvement in philanthropy.
In response to the increasingly popular commercially sponsored Gift Funds, such as Fidelity's "Charitable Gift Fund", many Community Foundation leaders have joined forc n supporting proposed legislation that could severely limit and make less attractive this blossoming kind of philanthropic development. The commercially sponsored "Gift Fund" advocates feel the underlying motive of this proposed legislation is to limit competition and protect market share in the development of new endowments and gift funds. Community foundations have dominated the market for many years and now feel threatened.
Community foundation advocates claim they want to compete on what they call a "level playing field with clarity for all on the limits," referring to limitations on donor or commercial involvement. The community foundation advocates gloss over the fact that almost all community foundations were established by consortiums of commercial banks.
The type of legislation being considered could enshrine what is already the tendency of many community foundations to seek eventual total charitable direction over all charitable funds, including "donor advised" ones. For example, many community foundations limit donor involvement for a specified number of years or for just the life of the donor. Most community foundations would prefer to have "Field of Interest" funds, which limit donors to specify only general areas of charitable interest, than "donor advised" funds, which allows donors to specify which charities are to be supported.
Because of this underlying agenda, the American Foundation believe that any proposed legislation will attempt to perpetuate the notion that there should be Section 507 or private foundation type limitations on donor involvement in the continued charitable direction over all types of "donor advised" endowment funds.
A Better Way. The issue should not be how much donor involvement (extent or degree) but rather what kind of involvement (quality or motive - is it intended or calculated to be helpful or will it be abusive). Any involvement that is reasonably calculated to help the charitable activity be more effective, worthwhile, or successful, should be encouraged and whole-heartedly welcomed.
Public charities now have excellent guidelines and tools readily available that can help determine what is good or bad involvement. And existing laws are sufficient to enforce their use. As long as the charity is in total control, having complete and full ownership, which it has to have under the current law, then it should be the one that determines how much donor involvement it is willing to allow or even encourage. Government should not make this decision for them. Other than encouraging philanthropy in general, the role of government should be to monitor and regulate with the purpose of deterring and correcting abuses.
New Laws are Sufficient and Effective.
The new Intermediate Sanctions Law (added by enactment of Taxpayer Bill of Rights 2, see IRC Section 2958) greatly improves the IRS's ability to effectively deter abuses and wrongdoing by public charities and social welfare organizations.
This new law along with already existing laws and regulations are sufficient to address the vast majority of real or potential abuses, such as private benefit, excess benefit, unreasonable compensation, disqualified persons, lobbying activities, influencing legislation, political expenditures, self-dealing, risk investments, private inurement, excess business holdings, mandatory distributions, and more. As a common sense "safety valve", community foundations also have a "variance power" which allows them to modify donor direction when a proposed charitable activity becomes unnecessary or incapable of fulfillment.
When any new abuses arise, we should diligently develop new procedures, policies, or laws that will correct them. However, the overriding importance and need for increased amounts of charity that can be achieved through donor involvement far outweigh the isolated cases of abuse that most likely would occur anyway.
Absent the occasional abuse, we should promote and encourage individuals, families, and business leaders to become more personally involved in all aspects of charity. Let's work at correcting abuses without killing the goose that lays the golden egg.
Looking Ahead
The central question is: Should we limit individual, family, and business involvement in charitable funding and charitable direction? And what do we stand to lose by doing so? When donors are involved in the charitable process, they assume a degree of ownership that leads to their giving more and becoming better people. This in turn, more often than not, leads to more effective and successful charitable programs.
The More Enlightened Position.
More personal and individual involvement in charity and "donor advised" funds should be allowed and highly encouraged. In fact, the more and longer the donor and his family are continually involved, the better.
Three good things usually happen when we allow individuals, families and business leaders to become more involved in the charitable process:
We describe these phenomena as individual or family legacy, or "charitable ownership."
Business or Commercial Involvement
We likewise applaud and encourage more business or commercially sponsored charitable development.
To the contrary of the position taken by most critics, we should applaud Fidelity and other similar commercially sponsored "Charitable Gift Funds". In a very short time, they have experienced spectacular success in developing charitable endowments at a lower cost and effort than anything seen in history. There is little charitable overhead, and the charge for the investment services is ordinary and reasonable. There would be an abuse if Fidelity was charging 5 times their standard investment fees, or if the Gift Fund was not making meaningful charitable distributions. Neither is the case. In fact, they claim they are distributing close to 20% per year to qualifying charities. This is a marvelous development.
Current laws provide incentives, in the form of tax deductions, to private individuals to be charitable. If businesses help develop new philanthropy because it just increases their regular product sales or services, its like having the "icing on the cake." Such a development should never be discouraged.
Good Causes
Every individual should adopt one or more good causes to support. We encourage everyone to be eagerly engaged in at least one good cause. Ideally we should be involved in several noble causes. There are different ways for us to provide this support. Some are able to give of their valuable time and effort . Others find it more meaningful and effective to provide financial assistance. Whatever anyone can do to support charity is greatly needed and welcomed.
Charity is an important human and spiritual value. Charity has also always been an important religious virtue. Most religions teach that we can best serve God by learning to serve and help others, especially those who have the greater needs, such as the poor, the hungry, the homeless, the widows and orphans, the lonely, the downtrodden, and the otherwise underprivileged. And even to the non-religious, charity is recognized as something that improves the quality of human life.
Summary/Crossroads
Need for More Charity. Charity can not only achieve a lot of good, it can also offset and in many cases correct a lot of bad that exists or otherwise occurs in the world. Everywhere we turn we see violence, drug use, immorality, insensitivity to life, destruction of property, disrespect for others, and crime in general. All of these can be significantly offset and reduced by increased levels of individual involvement in doing more good in the world.
Promoting and encouraging more individual involvement in charity is a positive move in the right direction. Increased donor involvement in "donor advised" funds is part of this positive movement. It will help create more incentives for wealthy people to allocate more of their financial means to charitable causes; the donors themselves will become better people; and more good, in general and in specific, will be accomplished. It is our sincere hope that every American can participate in this opportunity to help increase charity and philanthropy throughout the world.
Call to Action. If you support one or more of the positions presented in this declaration and have interest in helping us promote these principles, please contact us. If you are already promoting similar ideas and principles, we would like to help you in any way we can. Also, if you have ideas or knowledge that could be helpful in this movement we would appreciate hearing from you.
About Us | Family
Foundations | Corporate Foundations
Financial and Tax Professionals
| News | Contact Us | Site Map | Home
4518 North 32nd Street, Phoenix, AZ 85018
Telephone: (602) 955-4770
Fax: (602) 955-4707
E-mail: info@americanfoundation.org
Tech Support: info@americanfoundation.org
Privacy Policy Use Notice Disclaimer