Community Foundations

November 01, 1996-Community foundations are tax exempt charitable organizations described in Internal Revenue Code Section 501(c)(3). Community foundations are established to meet the charitable needs of a local community or geographic region. They accomplish this not by operating programs directly, but by providing support to other charitable organizations.

The principle behind a community foundation is to create and build endowment funds to generate investment income which can be used to make grants indefinitely into the future. Community foundations provide a vehicle for donors to meet their charitable needs. Community foundations generally establish an investment policy and a grant policy to provide for the growth of the donated property. Community foundations often spend a set percentage of their endowment assets annually on grants (5% is typical).

Donors receive the most advantageous tax incentives for donating cash or property to a community foundation as a community foundation is classified as a public charity by the Internal Revenue Service. Therefore, the higher annual deduction limits and favorable valuation methods are available.

Donors to the community foundation have a number of options for directing the manner in which their contributions will be used. They can give the governing board of the community foundation the discretion to use the funds for whatever charitable purpose they determine, they can specify a particular charitable field, they can name a particular charitable organization to receive support, or they can reserve the right to recommend from time to time the charities to which distribution should be made. This is done by creating a fund or account with the community foundation at the time the original gift is made.

The charitable funds that are available in a community foundation include donor advised funds, field of interest funds and designated agency funds. In a donor advised fund, the donor or other individuals the donor designates sit in an advisory capacity. They make recommendations on the grants to be made from the donor advised fund. In a field of interest fund, grants are made to a specified area of interest. In other words, the fund could be established to provide support to charities involved in "child welfare issues", "drug rehabilitation services", "cancer research", etc. In a designated agency fund, the grants are made to an existing charity in the community such as the YMCA or the American Red Cross.

In all of these funds, the ultimate control and decision in making grants must be vested with the community foundation. This is necessary in order for a gift to the fund to qualify as a tax deductible contribution. If control is retained by the donor, the IRS will determine that a completed gift was not in fact made and the donor will not be entitled to a charitable deduction.

Deferred giving arrangements can also be set up with community foundations. A donor may establish a charitable remainder trust or charitable lead trust for the benefit of a community foundation. Some community foundations also issue charitable gift annuity contracts. A few community foundations even have established pooled income funds. Each of these giving arrangements has its own particular benefits to both the donor and the charity involved.

For additional information on community foundations and private foundations, please visit the following sites:

Council on Michigan Foundations - A membership organization of over 360 community and private foundations within the State of Michigan.

Council on Foundations - A national membership association of over 1300 grantmaking foundations and corporations. The Council on Foundations home page includes the "Community Foundation Locator" service and links to many community foundations.