The Language of Philanthropy and Background on Community Foundations
This article will take a closer look at the terminology and language used to describe philanthropy in Ireland. It will also introduce the special role that community foundations play in those philanthropic efforts.
How does Philanthropy differ from Charity?
Philanthropy tends to be planned giving, developed with the input of professional advisors, family members and with detailed consideration of long-term returns on the investment. Charity in the typical sense tends to be more reactive.
Philanthropy Vehicles for Donors
A foundation is a nonprofit organisation that supports charitable activities in order to serve the common good. Foundations are often created with endowments—money given by individuals, families or corporations. They generally make grants or operate programs with the income earned from investing the endowments. It is usually set up as a company limited by guarantee and directors are appointed.
A charitable trust can also be established and is governed by trust law. They can be useful where there is a one-off transfer of funds. They typically remain quite private.
A community foundation is a grant-making and donor services organisation. They typically cover a defined geographic area. In effect they act as an intermediary or clearing house between donors and recipient charities. In so doing they provide an expert service to donors in terms of tax, identification of projects, administering the payment of all monies to charities, undertaking subsequent project assessment and reporting this back to the donor, maintaining all details of donations on a centralized database. The donor also receives the benefit of the charitable status of The Community Foundation so can gain immediate tax relief.
A donor-advised fund is a charitable giving vehicle administered by a third party such as a community foundation and created for the purpose of managing charitable donations on behalf of a family, individual or an organisation (for example a corporate or religious order). A donor-advised fund offers the opportunity to create an easy-to-establish, low cost, flexible vehicle for charitable giving as an alternative to direct giving or creating a private foundation. Donors enjoy administrative convenience, cost savings and tax advantages by conducting their grantmaking through the fund.
Community foundations pioneered the development of donor-advised funds, but others in the USA now also offer this service. Donor-advised funds are the fastest growing charitable giving vehicle in the United States of America, with more than 107,000 donor-advised accounts established, holding over $17.5 billion in assets in 2006.
Venture philanthropy is an approach to charitable giving that applies the principles of venture capital funding, such as long-term investment and operational support, to the non-profit or the third sector.
Its key components are:
- The active partnership, or engagement, of donors, volunteers and/or experts with charities to achieve agreed outcomes such as organisational effectiveness, capacity building or other important change;
- The use of a variety of financing techniques in addition to grants, such as multi-year financing, loans or other financial instruments most appropriate for a charity's needs;
- The capability to provide skills and/or hands-on resources with the objective of adding value to the development of a charity;
- The desire to enable donors to maximise the social return on their investment whether that be as a financial donor or as a volunteer of time and expertise.
A social entrepreneur can be defined as a visionary leader with a high-impact social innovation who takes our society forward by helping to create a picture for the future that is stronger than a nostalgia for the past.
Philanthropy in Ireland
Philanthropy Ireland is the association of independent philanthropic organisations in Ireland, including grant making trusts and foundations. Established in 1998 as a voluntary and informal network called the Funders’ Forum, the organisation assumed a new legal structure in 2004 and changed its name to Philanthropy Ireland. It had 21 members in 2008.
More information on www.philanthropy.ie
It is generally recognised that philanthropy is at an early stage of development in Ireland. Research was undertaken in 2008 to assess a baseline level of Irish philanthropy and Philanthropy Ireland was due to be released in December 2008.
What is an Endowment?
An endowment fund is defined as a permanent fund of which only the earned income can be spent. It is often established from a donation of assets such as shares or after a windfall for example the sale of a business. People also often choose to support organisations in their wills and an endowment fund can be a good option for some in this scenario.
Donors’ endowments can be pooled to ensure greater efficiency. Community foundations worldwide have adopted an endowment fund building strategy to create “community capital”. The 1,700 foundations in 46 countries have over $40 billion invested and are making grants of over $2 billion from this annually. By 2008, The Community Foundation for Ireland had built an endowment fund to over €27 million with the support of donors. The model is particularly suited to people and organisations (e.g. a family business) taking a longer term perspective on their philanthropy. An individual, family or company can establish their own endowment fund under the banner of The Community Foundation for Ireland. The fund can be named or anonymous. They simply allocate a sum of money – usually a minimum of €25,000 (€14,750 net after tax relief for individuals).
There are no set up fees, no need for trustees and no subsequent annual invoicing or audits. Everything can be organised literally overnight. A written agreement is completed between both parties and the administration and management of the fund is handled by community foundation staff. Donors can have as much or as little say as they like about how the income is then distributed. The Community Foundation for Ireland receives 1% from the interest earned which covers all its work. As a not-for-profit organisation, the costs are kept to the absolute minimum.
Reasons for Establishing an Endowment Fund – A Donor Perspective
Some people establish family funds by way of endowment simply because they have spare capital, some to involve their children to help foster their values, others seek to establish a fund as a memorial to parents or other loved ones (their parents’ sacrifices may have provided the means to which the donor became wealthy) or simply to make a difference in an area of particular interest to them, e.g. the environment or homelessness. For clients and advisors alike, it can be difficult to grasp how much can be achieved by endowment funds. Over a single lifetime (e.g. 80 years), an initial donation of €50,000 invested in a permanent endowment fund could potentially result in gifts to charities of €484,430 over that period. This initial gift will receive full tax relief and will only have cost €29,500, as the balance of €20,500 or 41% can be reclaimed through the tax system. Quite often, family members will add to the fund either in their wills or after further windfalls etc.
Reasons for Establishing an Endowment Fund – A Charity Perspective
Having an endowment fund protects charities in downturns and can help provide essential funding for ongoing core / administration costs in particular. A permanent endowment fund is ideal for a charitable bequest where a significant contribution may be more possible. Housing the fund at The Community Foundation can provide peace of mind for the donor that the fund will be used for the purposes agreed and that strong governance structures and procedures are in place.
While the value of endowments can fluctuate, they are usually conservatively invested to help protect and indeed grow the capital base, using a mix of equities, cash and gilts. A charity can establish its own endowment fund - as indeed many larger organisations do. In the USA and UK, many smaller and medium sized charities have established endowment funds under the umbrella of their local community foundations. The Community Foundation for Ireland can also provide such a service for Irish charities and community groups and there are a number of benefits in doing so. The Community Foundation for Ireland pools all donor and charity e-feasibility study. The Foundation assesses fund managers to assess the best manager for the job, regularly monitors and assesses this performance through its Finance,
Administration and Governance committee. A new endowment fund should be started with not less than €25,000, but this can be added to over time. Such a fund set up by a charity would be deemed to be a designated fund – i.e. the income achieved is designated for defined or general charitable purposes of that charity. By pooling funds, investment management fees are also significantly reduced.
Spend Down Foundations
A number of foundations will choose to spend down their capital over a defined timescale. Examples in Ireland include The One Foundation and Atlantic Philanthropies. This ensures immediate impact can be made on the causes and projects identified within the context of the organisation’s mission statement. In so doing they may seek to build capacity and sustainability in organisations by making potentially larger grants than an endowment fund based foundation could make (unless of course the endowment is very significant).
Article prepared by The Community Foundation for Ireland.