Community Foundations

Definition

Community foundations are qualified 501(c)(3) charities providing a wide variety of services, including supporting community programs and initiatives as well as administering donor-advised funds. A donor makes an irrevocable gift to the foundation either unfettered or with distribution instructions. The donor receives an immediate income tax charitable deduction for the contribution, subject to limitations. The community foundation holds the funds and makes distributions, mindful of any donor instructions. Donors are not limited to making recommendations to distribute funds to local charities. However, many community foundations have policies that encourage donors to instruct that funds be distributed to local charities.

Types of Funds

Community foundations make charitable distributions from separate funds based on the donor's instructions. These funds may be divided into the following categories:

$image\bullet.jpg$ Unrestricted fund—Makes charitable distributions at the foundation's discretion.

$image\bullet.jpg$ Designated fund—Makes distributions to a public charity named by the donor at the time of donation.

$image\bullet.jpg$ Field-of-interest fund—A donor designates distributions for a particular charitable purpose, funneled through a specific fund.

$image\bullet.jpg$ Donor-advised fund—A donor advises the community foundation on where to make the charitable distributions. The community foundation has actual legal control over the charitable distributions.

$image\button1.jpg$ Click here for more information about donor-advised funds.

Community Foundations Versus Private Foundations

Community foundations are attractive to donors because they offer many of the same benefits as private foundations, without some of the drawbacks. Gifts to community foundations generally allow the donor to take a larger charitable tax deduction than for comparable gifts to private foundations. In addition, private foundation restrictions, and accompanying penalties for non-compliance, are inapplicable to community foundations. Finally, giving to a community foundation requires less administrative and set-up costs in comparison to private foundations. The following chart illustrates the differences between community foundations and private foundations.

Community Foundations	Private Foundations
Community foundations are 50% organizations.	Private foundations are generally 30% organizations.*

Gifts of long-term, appreciated assets may be deducted up to full fair market value.	Gifts of long-term, appreciated assets generally may be deducted only up to cost basis.**

Community foundations are not subject to the private foundation restrictions.	Private foundations may not engage in the following activities: $image\bullet.jpg$ self-dealing between a foundation and its contributors; $image\bullet.jpg$ investments that jeopardize its tax-exempt status; $image\bullet.jpg$ holding business enterprises in excess of a specified maximum ceiling; or $image\bullet.jpg$ failing to distribute at least a minimum amount of the foundation's income for exempt purposes.

Excise taxes are not imposed on community foundations.	Excise taxes may be imposed on private foundations engaging in prohibited activities.

Donors may only advise community foundations on charitable distributions from their gift, and may not place any material restrictions on the donation.	Private foundations allow donors to retain control over their gifts.

*Certain types of private foundations are treated as public charities: pass-through foundations, private operating foundations, and pooled fund foundations.

**Contributions of "qualified appreciated stock" to private foundations are deductible up to fair market value rather than being limited to basis.

Single Entity Requirements

Community foundations may maintain separate trusts or funds and still be treated as a "single entity" for tax purposes. To be classified as a single entity, the following requirements must be met:

$image\bullet.jpg$ Name

The public must know the organization as a community trust, community fund, community foundation, or any other name conveying the same concept.

$image\bullet.jpg$ Common instrument

All of the organization's funds must be subject to a common governing instrument.

$image\bullet.jpg$ Governing body powers

The community foundation must have a common governing body holding the following powers over the funds to:

$image\bullet.jpg$ Modify any of the donor's restrictions or conditions on distribution of funds for designated charitable purposes or organizations, should those restrictions or conditions become unnecessary, unfulfillable, or inconsistent with the community's or area's needs

$image\bullet.jpg$ Replace any participating trustee, custodian or agent for breach of fiduciary duty under state law

$image\bullet.jpg$ Replace any participating trustee, custodian or agent for failure to produce a reasonable return of net income over a reasonable period of time

$image\bullet.jpg$ Return on investment

The governing body must ensure that all assets are invested under the terms of the community foundation's governing instruments. The governing body must also use accepted standards of fiduciary conduct to produce a reasonable rate of net income.

$image\bullet.jpg$ Financial reports

The community foundation must prepare periodic financial reports treating all of its funds as those of the organization.

Community Foundations and Supporting Organizations

Donors may wish to establish a 509(a)(3) supporting organization of a community foundation. Such supporting organization will be classified as a public charity due to its connection with the community foundation. Donors form supporting organizations of community foundations to allow for grants to be made for a multitude of charitable purposes. Supporting organizations not associated with community foundations have more limited charitable options.

$image\button1.jpg$ Click here to jump to a more detailed discussion of supporting organizations.

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