THE BUSINESS OF BENEVOLENCE

"One generation plants the trees... another gets the shade." - Chinese Proverb

Charitable Giving in the 21st Century

The great fortunes of the late 19th and early 20th centuries, created by the likes of Henry Ford, Andrew Carnegie, and Andrew Mellon, were the genesis of the first wave of great American foundations. These foundations were established before there was an income tax, so the term "tax-advantaged giving" meant nothing to turn-of-the-century philanthropists.

Nearly a hundred years later, we have a tax code that is the most complex in the world, and a huge, ever-growing body of law governing private foundations and all tax-exempt organizations. New forms of planned giving instruments have been invented, and an entire profession devoted to marketing them to potential donors has come into being. Meanwhile, the role of the non-government sector in providing many basic human services has grown exponentially. In the broad sweep of history, all of this has happened in just two generations-the blink of an eye.

What will happen to the "business of benevolence", as Carnegie called it, in the 21st century? Will technology be a boon to an activity as personal and subjective as charitable giving? Will everybody in the world be connected instantly to everybody else in the world? Can tomorrow's non-profit agencies instantly provide perfect audits and impeccable 5-year plans to the entrepreneurs who are considering a major gift? Will people still want to "do good" because they've "done well"?

Many of us who wrestle with such questions feel that most people give because they want to, not because they need to. If you or your child have gotten a good education, you will want to help that school. If you are grateful for the care that you or a loved one received at a hospital, you will want to show your gratitude.

The decisions you make about your estate will still be made over your dinner table, in your lawyer's office, or in a private moment when you bring all your hopes and dreams to bear on one of life's biggest challenges: How can I leave the world a better place?

The Community Foundation for Monterey County is here to help you answer that question.

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WHO WE ARE AND WHAT WE DO

"No one has ever become poor by giving." - Anne Frank

The Community Foundation for Monterey County

However you define a community foundation, from a donor's perspective, it's important to remember that a community foundation is a living, breathing entity. By commingling many different funds for a variety of needs, putting them under the governance of respected, volunteer community leaders, and using a prudent amount for grants to local agencies, a community foundation can change with the times. Just as important, a community foundation can protect a donor's wishes from becoming obsolete by redirecting the use of a gift to the closest related use.

Since the charitable landscape changes daily, you cannot do this kind of work without an experienced board that is skilled in finance and investments, law and estate planning, health issues, social and community service needs, environmental concerns, public and private education administration, and the cultural and artistic world. In the case of the Community Foundation for Monterey County, our 17 Board members bring a wide variety of professional skills, community knowledge and experience to the Foundation. They serve for a maximum of two terms of three years each.

To keep up with the panoply of needs in the non-profit sector, a community foundation also needs a paid professional staff. Their job is to impartially evaluate, along with the Board members, the strengths and weaknesses of grant proposals, and to look for ways to improve the long-range health of agencies that range from very young start-ups to very large, established programs.

Whether you are an individual donor, a financial advisor, a corporate giving officer, a private foundation trustee, or a committee member in a service club, we can help you achieve your vision and also give you an unbiased, inside look at nearly every one of the hundreds of public benefit, non-profit organizations working in Monterey County. The purpose of this booklet is to show you how to use this knowledge base and these years of experience to help you fulfill your goals in giving back to this community. In the process, we feel confident that you will be richly rewarded and enjoy helping others lead a richer, fuller life.

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TYPES OF FUNDS

Unrestricted Named Funds

By far the most useful kinds of funds held by the Community Foundation are the Unrestricted Funds. Gifts to the Operating Fund for current Foundation operations are welcome at any time and support all aspects of the Foundation's work, including assistance for local organizations and our work with local neighborhoods.

Often, we use the term General Endowment when we refer to the endowed Unrestricted Funds. The General Endowment, including the Fund for the 21st Century, gives the Board of Directors complete discretion in grantmaking. The Board applies the annual payout to an ever-changing variety of needs in the community in the areas of Education, Social and Community Services, Health, the Arts, and the Environment.

For donors with very broad charitable interests, or for donors who simply want to make a gift to improve the general quality of life in Monterey County, a gift of any size to the General Endowment is always appreciated and well used. Donors who give $10,000 or more can establish a Named Fund within the General Endowment. Whenever any of the income from a Named Fund is used, the grantee agency is informed of the source of the grant. So a Named Fund participates forever in the ongoing work of the General Endowment.

It is also possible to create a Named Fund by a bequest in a Will or Trust. That option appealed to Dr. John Marron when, according to his attorney, Dr. Marron "decided on specific bequests to individuals and set aside what he felt were prudent and generous bequests to the Red Cross and the SPCA, (but) about 1/3 of his estate still remained. At one point, I suggested that he consider naming the Community Foundation to receive that portion of his estate, to create a fund in his name for general charitable use at the discretion of the Board of Directors. The idea struck a responsive chord and gave my client a sense of closure that was reassuring for me to see."

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Field of Interest Funds

"We set up the Orrick Fund because we trust the Board and staff of the Community Foundation to know where the needs are greatest. The grants have gone to agencies that encourage and help disadvantaged youth overcome hardship, succeed in school, pursue healthful living, develop useful skills, and contribute in positive ways to their communities." - Andrew Orrick

Many donors want to focus their giving in one or more broad fields of service in the charitable world. They know that there is constant change among local service providers, with new agencies emerging, collaborative projects and coalitions of related agencies being formed, shifting patterns of federal and state government support, and of course, some agencies going out of business.

A solution for some donors may be a Field of Interest Fund, which leaves the decisions about the use of a fund's annual payout to the discretion of the Board of Directors within the general guidelines established by the donor. These funds may be created by the Board or by individual donors, either during their lifetime or by Will or Trust. By law, a Field of Interest Fund must have at least 5 potential grantee agencies in the Foundation's service area, so it is best to describe the giving range of a Field of Interest Fund as broadly as possible.

The Community Foundation has established funds for Women, the Environment, the Arts, and Youth, which are open to donations from any source. A special subfund of the General Endowment, the Fund for the 21st Century, can also receive gifts from multiple sources. It makes grants in the areas of Health, Education, Social and Community Services. Individual donors have also created Field of Interest Funds that benefit the elderly, disadvantaged children and families, and the needy. Whenever a grant is made from a Field of Interest Fund, the grantee agency is informed of the source of the funds that were awarded.

One recent example of a Field of Interest Fund is the Andrew D. and Marjorie S. Orrick Fund. It was the best possible vehicle for Mr. and Mrs. Orrick to help disadvantaged youth in Monterey County and to perpetuate their philanthropy in this constantly changing field. Although Marjorie Orrick is now deceased, the Foundation continues to carry out the purposes of the fund.

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Donor Advised Funds

"I am of the opinion that my life belongs to the community, and as long as I live it is my privilege to do for it whatever I can." - George Bernard Shaw

" Being a donor has truly been one of my most rewarding experiences. With my Donor Advised Fund at the Community Foundation, I can give to the specific agencies of my choice while also supporting our community as a whole. I know the Community Foundation quite well and trust the Board of Directors to manage the funds wisely and find the best way to serve the non-profit agencies that make Monterey County a better place for all residents. ." - Andrew Orrick

A Donor Advised Fund can be created by one or more individuals or by an organization such as a service club. For donors who want to avoid the expense and administrative burdens of creating a private foundation, but who want to involve their family in local charitable giving, a Donor Advised Fund is frequently an attractive alternative.

The purpose of a Donor Advised Fund is to permit the involvement by donors in the charitable activities and interests of the Foundation. They are designed to create a meaningful exchange of ideas between the donor and the Foundation, and to supplement and increase the impact of the general charitable activities of the Foundation. These funds allow donors to make recommendations to the Board of the Foundation for support of local (and sometimes non-local) charitable agencies. The Foundation must determine that the recommended grantee is tax-exempt, can use the grant for the charitable purposes recommended by the donor, and is generally within the purview of the Foundation's grantmaking. All grant recommendations are reviewed by the Board of Directors after staff review.

- Permanent Donor Advised Funds
With a minimum initial contribution of $25,000, a Permanent Donor Advised Fund can be established with a simple fund agreement letter in just one day. A Permanent Donor Advised Fund becomes part of the Community Foundation's endowment and is invested along with other endowed funds in a broadly diversified pool.

Donors may designate up to 50% of their Permanent Donor Advised Fund as distributable at the time the fund is established, provided there is at least $25,000 designated as non-distributable. Future gifts may also be divided between distributable (up to 50%) and non-distributable (not less than 50%).

Donors receive a charitable contribution deduction of up to 50% of adjusted gross income for cash gifts and up to 30% for gifts of appreciated securities, and any deductions that cannot be used in the year of the gift can be carried over under current law for up to an additional five years. The donor can share or designate the responsibility for recommending grants with a spouse or with children, thus creating a new vehicle for true "family philanthropy". Any corporation, civic organization, or other group that establishes a Donor Advised Fund will have the privilege of making grant recommendations for renewable periods of up to ten years.

In general, the Foundation seeks to administer Donor Advised Funds that use the annual payout for grants each year. If a donor wishes to accumulate income for a period in order to make larger grants at a later date, the donor must specify in writing the purpose for which income is to be accumulated. In general, the principal of a Permanent Donor Advised Fund may not be invaded unless the Board of the Foundation has authorized such a provision at the Fund's inception. In no case will distributions of principal exceed 50% of the donated value of the Fund's assets, and at all times, the principal balance must exceed $25,000, after distributions. Unless otherwise approved by the Board, the minimum grant from a Permanent Donor Advised Fund is $500. A Donor Advised grant may be awarded to any eligible local, national, or international charitable agency.

- Temporary Donor Advised Funds
A Temporary Donor Advised Fund is intended to be fully distributed within a relatively short period of time (usually 2 years or less), and can be created with a minimum gift of $10,000. This can be an attractive way to get to know and participate in the work of the Community Foundation. The Foundation invests these distributable funds in money market funds to avoid fluctuations in market value. Because Temporary Donor Advised Funds are usually quite active, the minimum grant size is $2,000.

- For All Types of Donor Advised Funds
The staff of the Community Foundation is always available to help donor advisors find the most urgent need in the donors' areas of concern, or identify the most effective agency among a range of choices familiar to the donors. When the period for advice terminates, usually upon the death of the donors, a Donor Advised Fund becomes a Named Fund in the General Endowment, so the family's tradition of local giving is perpetuated.

The Donor Advised Fund option is often attractive to trustees of private foundations who do not want to continue to shoulder the administrative or investment burden of running a private foundation. For donors who receive large amounts of ordinary income in a particular year (such as in a retirement year or in a bonus), a Donor Advised Fund can offer an offsetting tax deduction and the time to develop a charitable giving plan. For individuals facing large capital gains because of a stock buy-out, or whose stock portfolios have become too heavy in equities, contributing such stocks to create a Donor Advised Fund will avoid capital gains tax on the contributed stocks. The taxes due on distributions from retirement plans or on the gains from the sale of a business can also be offset in many cases by contributing these assets to a Donor Advised Fund.

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Restricted Purpose Funds

"York School is pleased to have the Community Foundation as a partner in managing funds for our endowment. We share a common goal, to meet needs and support the local community." - Chuck Harmon, Head of School, York School

The Community Foundation holds many funds with designated or restricted purposes. Some have been established by bequest, in cases where donors want the payout from a named fund to be distributed every year to a pre-selected list of local agencies. In other cases, agency boards and other donors have established funds as permanent endowments for operating support of one or more agencies. These funds are open to donations from anyone in the community and are dedicated to the specific agency in perpetuity, or to the closest related one, if the agency is no longer operating.

There are many other possible uses for Restricted Purpose Funds. The Foundation holds funds for annual teaching awards and for outstanding work in architecture, for example. The portfolio also includes funds dedicated to scholarships for high school and college students, and one for professional advancement in book publishing. There are funds for camperships for Scouts, for faculty development, and for the purchase of children's books at local libraries. There are even funds for maintenance of the gardens and grounds of a historic building and the fabulous rose garden at La Mirada, the home of the Museum of Art's Dart Wing.

It is also possible to create a fund that combines the basic features of an Unrestricted or a Field of Interest Fund with those of a Restricted Purpose Fund. For donors who have a clear idea of the specific agencies they want to support, but who also know that new needs will emerge and new agencies will be created to meet those needs, this type of "hybrid" fund may be an attractive option. By asking that a portion of the fund's payout be allocated to named beneficiary agencies and another portion be made available for grants in a broad field of interest at the Board's discretion, the donors know their fund will always keep up with current needs.

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Supporting Organizations

"My family and the Community Foundation set up the Lori and Lou Flagg Memorial Youth Fund to remember our beloved daughters and to do some creative things for teachers and students in the middle schools. The Teaching Awards and the college scholarships for 8th graders have been inspiring for all of us."- Morgan Flagg

A Supporting Organization is a separate non-profit charitable corporation, a kind of subdivision of the corporate structure of the Community Foundation. It qualifies as a public charity, not as a private foundation, because its basic purpose is to "support" the charitable work of the Community Foundation. Although it is a separate entity and files a separate tax return, it is structured so that one or more family members can be Board members of the Supporting Organization. The majority of Board members, however, must be named or appointed by the Community Foundation, and the organization must be organized and operated exclusively to carry out one or more of the purposes of the Community Foundation. The Lori and Lou Flagg Memorial Youth Fund is an example of a Supporting Organization.

This type of fund may offer several advantages to the right donor. If a trustee of a private foundation wants to terminate the foundation but continue to operate a more flexible fund, the private foundation can be "converted" into a Supporting Organization for the Community Foundation, and thus enjoy public charity tax treatment. A family with a tradition of local giving may want to maintain a separate entity which is designed to be permanent and which can take advantage of the Community Foundation's investment and grantmaking expertise. This option may be more appealing than a Donor Advised Fund because of its permanent nature.

To qualify as a Supporting Organization, the governing documents must meet three separate tests: an organizational and operational test, a relationship test, and a control test. All of these tests are designed to ensure that a Supporting Organization does not operate like a private foundation. Since this section of the Internal Revenue Code (509(a)3) is particularly complex, we recommend that anyone who wants to create a Supporting Organization consult first with the Community Foundation and our legal counsel for assistance.

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A Word on Payout

Any trustee of any type of charitable foundation has an inherent duty to use good judgment and prudence in managing the foundation's assets. In California, the basic guidelines for investment management in the non-profit sector are found in the Principal and Income Act. These guidelines allow managers of charitable assets to take a total return approach to investing, which means that in deciding how much to distribute in grants (or "payout"), they can and should consider current income needs, the importance of preserving and building principal, and the long-term effects of inflation. The Board of the Community Foundation adopts an annual payout for all of our permanent endowment funds with that philosophy in mind and with an awareness of the long-term performance averages for stocks, bonds, and other investment instruments.

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GIFT AND ESTATE PLANNING GIFT METHODS

"I shall pass through this world but once. Any good therefore that I can do or any kindness that I can show to any human being, let me do it now. Let me not defer or neglect it, for I shall not pass this way again."- Mahatma Gandhi

This section is a summary of the various types of outright (or lifetime) gifts and the most common forms of "planned" gifts that can be made. Especially in the case of charitable remainder gifts, we strongly recommend the use of professional counsel in structuring, drafting, and reviewing all the tax implications for such charitable giving plans.

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Outright Gifts

- Cash and Non-Appreciating Properties
Charitable gifts of cash and non-appreciating property qualify for federal income tax deductions at cost in the year the gift is made. The gift is deductible up to 50% of adjusted gross income, and any excess deductions can be carried over for up to 5 years if necessary. The higher the donor's tax rate, the greater the savings.

- Appreciated Securities and Real Estate
Long-term stocks, bonds, and real estate that have increased in value may be very appropriate for charitable gifts. The donor is eligible for a charitable deduction equal to the fair market value of the property in the year the gift is made, and all capital gains tax on the property is avoided. This type of gift is deductible up to 30% of the donor's adjusted gross income, and any excess deductions can be carried over for up to 5 years if necessary.

- Ordinary Income and Short-Term Capital Gains Property
Such gifts qualify for federal income tax deductions at cost in the year the gift is made. They are deductible up to 50% of the donor's adjusted gross income, and any excess contributions can be carried over for up to 5 years if necessary.

- Bargain Sale
In a bargain sale, the donor sells appreciated property at a lower price than the fair market value to a charity, with the charity realizing the difference as a gift. Each part of a bargain sale is reported separately. The donor reports capital gains on the sale portion, and receives a tax deduction for the gift portion. The basis is allocated between the gift and the sale portion.

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Charitable Remainder Gifts

"We exist temporarily through what we take, but we live forever through what we give." - Barbara Bush

- Charitable Remainder Trusts
The basic purpose of a charitable remainder trust is actually fairly simple: to pay the donor, or (after the donor's death) the donor's spouse (or another individual) income for life (or a term of years) and to then distribute the trust principal to charity when the last income beneficiary has passed away (or the term of years expires). With certain types of trusts (unitrusts), the donor can change the list of charities (or "remaindermen") at any time during the life of the trust. By using low-yield, appreciated securities to set up a charitable remainder trust, the trust can sell those assets without incurring any capital gains liability, and it can then purchase new, higher-yield stocks. That way, donors can actually increase their current income, and make a major gift to charity with assets that would otherwise have been taxed heavily if they were sold and the proceeds of sale given directly to charity.

There are two basic types of charitable remainder trusts: a unitrust and an annuity trust. The unitrust pays out a specified percentage of the trust's value, calculated annually. This amount must be at least 5% of the annual net fair market value of the trust assets. Donors can make additional contributions to a unitrust during their lifetimes or through their Wills. Obviously, if the trust's assets increase in value, the annual payments increase. The annuity trust pays out a fixed amount each year, and that amount must be at least 5% of the initial value of the property or assets of the trust. Subsequent additional contributions to annuity trusts are not allowed.

A charitable remainder trust pays no income tax on accumulated income or capital gains. Donors can receive an immediate Federal and State income tax deduction (and spread it out over 5 years if needed) by creating a charitable remainder trust. The amount of the deduction is determined by Treasury Department tables that consider several factors, including the type of trust (unitrust or annuity trust), the percentage or amount to be paid out each year, and the number and age of the income beneficiaries.

A variation of the standard unitrust is the net income unitrust or the income only unitrust. This type of trust pays the beneficiary either the net yearly income or a fixed percentage, whichever is less. It can also have a "catch-up" clause, which permits the trust (in any subsequent years when the income exceeds the fixed percentage) to make up for any deficiencies that may have occurred in prior years.

- Q-Tip Charitable Remainder Trusts
The term "Q-Tip" stands for "Qualified Terminable Interest Property". In a trust of this type, the donor's spouse must be given the right to all of the income from the property in the trust for his or her lifetime. Then the property can pass to the Community Foundation. One of the advantages of a Q-Tip trust with a charitable remainder is that the trust can give its trustees the power to invade the trust principal in case the spouse has unexpected medical expenses or other needs.

- Charitable Remainder Interest in a Residence or Farm

"Wealth is not to feed our egos, but to feed the hungry and to help people help themselves." - Andrew Carnegie

A full or partial interest in a home (any home you own) or farm can be given to the Community Foundation, and the donor can retain the right to live in the home or operate the farm for the rest of his or her life. The gift will create an income tax charitable deduction for the present value of the Foundation's estimated remainder interest, and the donor will avoid any potential capital gains tax on the home or farm's built-in appreciation. The charitable deduction thus frees up tax dollars, creating spendable income without any disruption in the donor's lifestyle. When the Foundation receives the property, it can be sold to establish a named fund in the General Endowment, a new Donor Advised Fund, a new Field of Interest Fund, or a new Restricted Purpose Fund.

- Charitable Lead Trusts
A full or partial interest in a home (any home you own) or farm can be given to the Community Foundation, and the donor can retain the right to live in the home or operate the farm for the rest of his or her life. The gift will create an income tax charitable deduction for the present value of the Foundation's estimated remainder interest, and the donor will avoid any potential capital gains tax on the home or farm's built-in appreciation. The charitable deduction thus frees up tax dollars, creating spendable income without any disruption in the donor's lifestyle. When the Foundation receives the property, it can be sold to establish a named fund in the General Endowment, a new Donor Advised Fund, a new Field of Interest Fund, or a new Restricted Purpose Fund.

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Retirement Plan Beneficiary Designation

Retirement plans payable to anyone other than your spouse may be subject to estate taxes at death, followed by income taxes as funds are withdrawn to pay estate taxes. Naming the Community Foundation as the beneficiary or as the alternate beneficiary can avoid this double taxation.

By naming the Community Foundation as the beneficiary, your retirement account will pay neither income nor estate taxes. 100% of your retirement savings will be used to support your charitable goals.

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Life Insurance Beneficairy Designation

If you no longer need as much life insurance as you did when you were younger, you can donate the policies to the Community Foundation and establish a Fund in your name by simply naming the Foundation as the owner and irrevocable beneficiary of the policies. If the policies are fully paid up, you can take a tax deduction for either the replacement value or your cost, whichever is less. If the policies are not paid up and you continue paying the premiums, the payments are deductible as charitable contributions. In either case, you get an immediate tax deduction and you may save estate taxes later.

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SERVICES FOR BUSINESSES, PRIVATE FOUNDATIONS AND NON-PROFIT AGENCIES

"How lovely to think that no one need wait a moment; we can start now, start slowly changing the world." - Anne Frank

The Community Foundation, in at least one sense, is like a major university: the Foundation is interested in everything that goes on in the community and in the world at large. At the local level, a key objective is to keep track of trends and needs in every imaginable field and in every part of Monterey County. The Foundation has no vested interests, list of "approved" agencies, or any other slant on local needs.

That impartial, professional analysis can be especially valuable to local businesses or corporate giving programs when they face the perennial blizzard of appeals from local agencies. The staff of the Community Foundation is available to help evaluate grant proposals, formulate giving priorities, analyze the strengths and weaknesses of grant requests, and assist with new initiatives. In addition, the Foundation can hold and administer a permanent endowment fund in the name of a corporation (or anonymously) to help smooth out the annual ups and downs of the company's corporate giving budget.

Sometimes the administrative burdens of running a small private foundation become too onerous, either because of the age of the donors or the trustees, or the time demands on the next generation of family trustees. The burdens of filing separate tax returns, monitoring payment of an annual excise tax on the net investment income, and investing the assets for both current income and reasonable growth can become quite onerous. One option is to transfer the assets to a fund at the Community Foundation, possibly as a Donor Advised Fund or as a Field of Interest Fund consistent with the giving interests of the former private foundation. It is also possible to establish a fund by contributing some or all of the private foundation's current year income to begin building a relationship with the Community Foundation.

Many local non-profit agencies have established permanent, restricted purpose endowments with the Community Foundation. The agency receives several benefits from this kind of arrangement: (1) a new, permanent and (hopefully) growing stream of operating income; (2) professional investment expertise and broad diversification; and (3) publicity for the fund to the entire Community Foundation mailing list. Just as important is the assurance for donors that the fund will always be there to support the work of the agency, or that of the closest related agency if the original agency ceases operations.

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