A look at some of the legal and non-legal aspects of merging one charitable program or organization with another.
Ray S. Munney, executive director of the Zenith County Community Foundation, had three meetings scheduled Tuesday morning. The first was with the new manager of a local corporation's charitable funds. He'd called in a panic last week to say that he wasn't sure their company scholarship program was operating in compliance with IRS rules. Might the community foundation be interested in taking over the program?
The second meeting was with the board chair of a community foundation established to benefit neighboring Apex County. She had told him that the group was not generating the kind of public support it had anticipated and that the board was "considering its options." Munney wondered whether operating as a regional affiliate of the nearby Zenith Foundation might be an attractive option for everyone.
The third meeting was with a local trust officer who administered the Smith Foundation, a small family foundation. Munney knew that most of the family members had long since moved away and the Smiths who remained in town weren't on speaking terms with one another. Good chance, thought Munney, that the trust officer was going to raise the possibility of terminating the Smith Foundation into a donor-advised fund at Zenith.
Opportunities to expand by taking on the programs and funds of other -organizations do not usually arise as fast and furiously for most community foundations, but managers should always be prepared to consider those chances.
Can We Take This on?
A quick check of the community foundation's organizing documents (certificate of incorporation or deed of trust, bylaws and board policies) should indicate whether they permit the community foundation to integrate a new program. If the documents bar grants to individuals, for example, a corporate scholarship program will definitely not be a good fit.
If the deed of trust restricts grantmaking to one county, an affiliate fund for another county will violate this provision. If the community foundation is determined to take on a new activity that its organizational documents do not permit, it will need to amend the relevant provisions through state law processes and notify the Internal Revenue Service (IRS) of those changes.
Should We Take This on?
Making a decision about taking on an existing program or organization should involve considering a range of factors including the administrative capacity of the community foundation and the effect of a merger on its public image.
Scholarship programs, for example, are notoriously labor-intensive; does the community foundation have sufficient staff to run such a program? Will the size of an affiliate fund justify the administrative burden that it will bring? Can the community foundation count on administrative fees or other resources to staff these new activities? Will bringing in a fund with a family that's sparring like the Hatfields and McCoys be a minor headache or a public embarrassment?
What Should We Be Worried about?
In a word: liability.
A community foundation that takes on an existing organization or program does not want to find itself financially responsible for taxes, judgments or other claims that have arisen before the merger or may arise as a result of the combination. The community foundation should learn as much as it can about an existing fund's activities and operations through a review of tax returns, audits and other documents.
An expert attorney should be able to draft an agreement that limits the community foundation's liability and provides that any liabilities of the new program be satisfied from its funds. If the company scholarship program has operated outside the bounds for a number of years and owes fines and penalties to the IRS, for example, these should come from its assets, not the community foundation's funds. Extending the merging organization's insurance coverage, especially its directors and officers liability insurance policy, may be wise.
Community foundation managers should remember that their negotiating position is generally strongest before any documents are signed. This is when the group seeking a merger is most eager to compromise, and it should be when the community foundation states its requirements most clearly. If there's a concern that the feuding family members will not be able to come to consensus on grant recommendations, for example, this is the time to select a single, family representative; set an annual deadline; and provide that if suggestions are not received in a clear and timely fashion, distributions will be made at the community foundation's discretion.
Similarly, this is the time to determine what arrangements will make the affiliate fund function most smoothly. Should it retain some autonomy and become a supporting organization to the community foundation or should it be integrated as a donor-advised fund? If it is to become a donor-advised fund, who will appoint the donor advisors? How will the community foundation ensure that fundraising is done responsibly?
How Should We Go about This?
Mergers and affiliations may require actions at both the state and federal level. Should the Apex Community Foundation choose to end its existence as an independent organization and become a donor-advised fund at Zenith, for instance, it may choose to dissolve or merge under state law. It will need to inform the IRS of its actions; most times this is done by including the information on its final Form 990.
It is not usually difficult to close a nonprofit corporation, but the process may be more complex if the Apex Community Foundation is a trust or if, under state law, the state attorney general is required to be a party to the proceedings or court approvals are needed.
The process of winding up a private foundation can seem daunting, but generally is not especially difficult. If the Smiths want to end the foundation's legal existence, they will need to take the appropriate steps under state law. But, as far as the IRS is concerned, if the community foundation has been in existence for five years or more, termination may be a matter of transferring the fund and checking a few special boxes on the private foundation's final tax return. One technical rule to keep in mind, though, is that the private foundation must wait 24 hours after it has transferred its assets before it goes out of existence.
Transferring a fund like the company scholarship program may also be fairly straightforward. Although there may be a stack of agreements to sign between the company foundation and the community foundation, there will probably not be any state procedures to follow. If the scholarship program is a new activity for the community foundation, it should inform the IRS. This is normally done on Form 990; a question on the form asks the filer to report new activities.
No matter what the transaction that brings an existing fund or organization under the community foundation's umbrella, expert advice from knowledgeable counsel is crucial. Good legal advice and well-drafted documents can help protect the community foundation's interests and assets and start its new relationships off on the right foot.