Funds Management

FAQ: Agency Endowment Funds

council-webteam — Mon, 11 Nov 2013 20:05:28 +0000

FAQ: Agency Endowment Funds council-webteam Mon, 11/11/2013 - 15:05

FAQ: Agency Endowment Funds

What is an agency endowment?
What types of organization can establish an agency endowment at a community foundation?
When a public charity establishes an agency endowment at a community foundation, which organization owns the contributed funds?
Since the agency is releasing legal ownership of the transferred assets, how can the agency’s board agree to the transfer of assets to establish an agency endowment without violating its fiduciary duties?
Can a community foundation accept a non-endowed fund from an agency?
Should fund agreements for agency endowments include the variance power?
If the fund is endowed, can the fund agreement still permit an agency to access principal?
Can a nonprofit reserve the right to force a distribution of the fund (or a part of the fund) back to itself?
Can the community foundation maintain a hybrid fund (i.e., contributions from the agency and contributions from third parties in one fund) or should the community foundation create two separate funds?
Where can I find a sample agency endowment agreement?
Should a community foundation include contributions to agency endowments as contributions to the community foundation on its Form 990?
The question of whether a third-party donor was aware that the contribution for the benefit of an agency was a contribution to the community foundation and subject to the foundation’s variance power is a key to determining the accounting treatment for a contribution. What should a foundation do if variance power is not easily determined?
Where can I find additional resources on the accounting treatment of agency endowments for the community foundation and beneficiary agency?

Agency Endowment Basics

What is an agency endowment?

An agency endowment is a type of designated fund established by a charity at a community foundation for the charity’s own benefit or the benefit of a related entity. That is, the donor or resource provider and the beneficiary or recipient organization is the same entity. For example, an art museum transfers funds to a community foundation to establish a fund that will provide annual distributions to the art museum for its own use. The instrument of transfer used in to establish an agency endowment references the variance power and transfers legal ownership over the assets to the community foundation.

What types of organization can establish an agency endowment at a community foundation?

A public charity under Section 509(a)(1), 509(a)(2), or 509(a)(3) may establish an agency endowment at a community foundation. This may include an endowment created by a government unit.

A community foundation should not establish an agency endowment for a private foundation or non-charity. Contributions to an agency endowment fund established for a private operating or non-operating foundation would likely be viewed as contributions subject to a material restriction, due to the private foundation status of the agency. In addition, such a fund would raise the question of whether the community foundation’s public charity status was being used by a private foundation to circumvent the private foundation minimum distribution requirements.

An agency endowment fund established by a non-charity would be problematic because distributions from an agency endowment are generally provided for the general support of the designated charity. In the case of a non-charity, the community foundation would need to establish significant processes to ensure that grants from the fund were only used for charitable purposes rather than for general support of the non-charity. For this reason, such a fund would likely be classified not as an agency endowment but as a field of interest fund.

When a public charity establishes an agency endowment at a community foundation, which organization owns the contributed funds?

The community foundation has legal ownership of funds contributed to an agency endowment. As such, the community foundation’s board has fiduciary responsibility over the funds. The legal ownership of the funds is a frequent a source of confusion between agencies and community foundations. Therefore, the ownership should be clarified in the fund agreement at the start of the relationship. The confusion arises, in part, because FAS 136 requires that an agency recognize a beneficial interest in assets held by a community foundation as an asset on the agency’s books. This leads some agencies and their advisors to believe they maintain legal ownership over the funds. However, FAS 136 only affects the accounting treatment of the funds, not the legal ownership.

Since the agency is releasing legal ownership of the transferred assets, how can the agency’s board agree to the transfer of assets to establish an agency endowment without violating its fiduciary duties?

The agency’s board must make the decision regarding whether transferring legal ownership of the funds to establish an agency endowment is consistent with its fiduciary duties. An agency’s board may decide that such a transfer is prudent and consistent with its fiduciary responsibility to the organization because of the benefits provided as a result of the relationship with the community foundation. For example, the agency may benefit from the expertise of the community foundation in long-term management of assets, the flexibility the community foundation may provide by accepting types of non-cash contributions not accepted by the agency, or the protection that the transfer will provide by establishing an endowment at a separate organization.

Can a community foundation accept a non-endowed fund from an agency?

If established properly, a community foundation may accept a non-endowed fund from an agency. The key is that the agency may not reserve the right to unilaterally withdraw the fund from the community foundation. Instead, grants to the agency must be subject to the community foundation’s approval. When establishing such a fund, it is important that the agreement clearly states that distributions are always subject to the approval of the community foundation. Such a fund could be called an “agency fund” to distinguish it from endowed funds.

Fund Agreements

Should fund agreements for agency endowments include the variance power?

Yes. Because an agency endowment comes with the legal restriction that distributions from the fund would benefit the named agency, the fund agreement should include the variance power. In addition, the National Standards for U.S. Community Foundations require that the variance power appear in the fund agreement. The variance power is the power held by the governing body of the community foundation to modify any restriction or condition on the distribution of funds for any specified charitable purpose or to any specified organization if, in the sole judgment of the governing body, such restriction or condition becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served.

If the fund is endowed, can the fund agreement still permit an agency to access principal?

A fund agreement may permit an agency to request or recommend a distribution of principal. The fund agreement may contain a general provision permitting a request for distributions of principal or the agreement could outline specific reasons for which a distribution of principal may be requested (e.g., capital projects). In either case, the agreement should be carefully drafted to ensure that any such agency request or recommendation is solely advisory. The community foundation must maintain final authority and control over whether such a distribution of principal will be permitted.

Can a nonprofit reserve the right to force a distribution of the fund (or a part of the fund) back to itself?

No. A contribution to a community foundation is subject to the legal control of the community foundation. Allowing the nonprofit to reserve the right to force a distribution would be contrary to the foundation’s legal ownership of the fund. For this reason, the reservation of the power to unilaterally withdraw the fund in full or in part creates several potential results which are often undesirable. First, reservation of such power raises the question of whether a completed gift has been made by the agency to the community foundation. If the gift is not completed, it may not be included in the calculation of the community foundation’s public support test as a contribution. Second, an incomplete gift may lead to the conclusion that the community foundation is managing somebody else’s fund. Third, reservation of the right to unilaterally withdraw the funds may be considered a material restriction calling into question whether the fund is a component fund. Finally, a contribution to the community foundation is subject to the legal control of the community foundation. Allowing the nonprofit to reserve the right to force a distribution would be contrary to the foundation’s legal ownership of the fund.

Can the community foundation maintain a hybrid fund (i.e., contributions from the agency and contributions from third parties in one fund) or should the community foundation create two separate funds?

As a legal matter, one agreement could govern a fund that accepts contributions from third parties and contributions from the agency. However, because contributions from the agency and contributions from third parties may be treated distinctly for accounting purposes, a community foundation may find it more practical to establish two separate funds. In this situation, the community foundation should review FAS 136 and the materials available from FAOG on the subject to determine how the fund should be handled to ensure proper accounting.

Where can I find a sample agency endowment agreement?

Members of the Council on Foundations may access a sample agreement.

Form 990 Reporting

Should a community foundation include contributions to agency endowments as contributions to the community foundation on its Form 990?

Yes. The application of FAS 136 does not affect the legal treatment of contributions to and grants from agency endowments. Regardless of the treatment of such contributions under the accounting rules, a contribution to the community foundation for an agency endowment is treated as a contribution to the community foundation for the purposes of Form 990. This treatment allows contributions to be included in calculating the community foundation’s public support test and is consistent with the principle that the contributions are contributions to the community foundation and subject to the community foundation’s legal control. Grants from agency endowments to an agency should also be recorded as grants from the community foundation to the agency for the purpose of Form 990.

Additional Resources

The question of whether a third-party donor was aware that the contribution for the benefit of an agency was a contribution to the community foundation and subject to the foundation’s variance power is a key to determining the accounting treatment for a contribution. What should a foundation do if variance power is not easily determined?

Some examples of determining variance power may be found in the FAS 136 Implementation Guide for Community Foundations. If the treatment is not clear, consult local counsel for a specific legal opinion so you can establish the proper accounting for the endowment.

Where can I find additional resources on the accounting treatment of agency endowments for the community foundation and beneficiary agency?

See Accounting for Agency Endowment Funds Held at Community Foundations.

This information is not a substitute for expert legal, tax or other professional advice and we strongly encourage grantmakers and donors to work with their counsel to determine the application of the law to their particular situations. This information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.

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Survey Results: The Operation of Women’s Funds at Community Foundations

david.rosado@cof.org — Mon, 28 Aug 2023 18:17:08 +0000

Survey Results: The Operation of Women’s Funds at Community Foundations david.rosado@cof.org Mon, 08/28/2023 - 14:17

Survey Results: The Operation of Women’s Funds at Community Foundations

After a request by a CF Insights member seeking information about the operation of Women's Funds at community foundation, a survey was created and administered to a subset of potential respondents. This short, eight-question survey collected some high-level information about fees pricing, revenue sources, and the proportion of related responsibilities owned by volunteers and community foundation staff.

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Shifting Practices, Sharing Power? How U.S. Philanthropy is Responding to the 2020 Crises

emily.moses@cof.org — Tue, 15 Sep 2020 18:29:23 +0000

Shifting Practices, Sharing Power? How U.S. Philanthropy is Responding to the 2020 Crises emily.moses@cof.org Tue, 09/15/2020 - 14:29

Shifting Practices, Sharing Power? How U.S. Philanthropy is Responding to the 2020 Crises

The public health, racial justice, and economic crises of 2020 have affected millions of Americans and laid bare the glaring inequities in our systems and institutions.

A new report from Council on Foundations, Philanthropy California, and Dalberg Advisors outlines how the US philanthropic sector is responding to the 2020 crises — and the opportunities to shift practices and share power to enable communities and the industry to #BuildBackBetter.

We surveyed 250 foundation leaders and conducted more than a dozen in-depth interviews to assess how the sector is changing in three ways: resourcing, priorities, and internal operations. Across all three, we found shifts in practices yet few examples of increases in power sharing.

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Balancing Purpose, Payout, and Permanence: Strategy Guide

emily.moses@cof.org — Mon, 31 Aug 2020 18:12:51 +0000

Balancing Purpose, Payout, and Permanence: Strategy Guide emily.moses@cof.org Mon, 08/31/2020 - 14:12

Balancing Purpose, Payout, and Permanence: Strategy Guide

This Strategy Guide, developed in partnership with the National Center for Family Philanthropy, invites you to reflect more deeply on how your foundation chooses to balance the four factors of Purpose, Conditions and Trends, Time Horizon, and Assets for Mission, especially in times of greater crisis or opportunity. It leaves the final decision to you, without judgment for your payout amount, lifespan, or mission. To aid you in the journey into the soul and stewardship of your philanthropic assets, you will find guidance on:

Strengthening the stewardship and governance of your portfolio
Challenging assumptions about perpetuity and payout
Understanding the spectrum of choices foundations use to balance purpose, conditions and trends, permanence, and spending
Leading more intentional board conversations
Resources for improved investment stewardship
Thinking outside the box on spending and time horizons

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Administrative Fees

council-webteam — Sun, 16 Nov 2014 18:13:02 +0000

Administrative Fees council-webteam Sun, 11/16/2014 - 13:13

Administrative Fees

Community foundations have one thing in common: When it comes to administrative fee structures, no two are alike. While there's no one right answer, it's important to review and compare your foundation’s fee structure to other foundations of comparable size. Many community foundations are doing just that to streamline their own fee calculation and collection processes. In this edition, we have provided the tools and statistics you’ll need to get started.

The differences among most community foundations are in how fees are assessed and calculated. Some foundations design their fee structures based on the type of funds or services they offer. For example, a fee structure might be organized by any or all of the following:

Fund type: Is it donor-advised, designated, field-of-interest, and/or unrestricted?
Fund longevity: Is the fund temporary or is it an endowment?
Stratified services: Is there a tiered level of service with various fees per level?
À la carte: The community foundation may offer special services and assess donors on a fee-per-service basis (for example, if the donor wants to fundraise for the event).

Most community foundations charge donors a percentage of the fund size for administering the fund, which is calculated using basis points. In addition to that percentage, some foundations charge minimum fees and/or transaction costs.

To determine the appropriate percentage of permanent funds, community foundations can refer to their spending policies and the payout allowed for each fund. For example, if a foundation’s payout is 5.5 percent per fund, it might allocate 4.5 percent to grants and 1 percent to administrative fees.

Other funds may not be subject to a spending policy. In these cases, a community foundation can determine the fee by the level of support the fund requires. The foundation may also charge a separate investment fee for the fund (0.25 percent to 1 percent), which covers a mix of managed accounts, fixed income and equities, custodian, and/or consultant fees.

Community foundations can also calculate fees at different times—monthly, quarterly, or annually. However, keep in mind that calculating fees consumes more staff time. In lieu of staff periodically calculating fees, you can calculate the fees for some funds according to activity. For example:

fees assessed on the front end of the fund (when the fund is established)
fees assessed by transaction—at contributions and/or distributions
fees for pass-through funds

The method of calculating also varies and can be based on any of the following:

average daily balance (calculated weekly or monthly)
current market value at the beginning or end of the month or quarter
labor and overhead costs for separate services (for example, you charge fees when your foundation renders special services)

Most foundations calculate payout on a rolling quarterly average and administrative fees monthly based on the average daily balance. Foundations may or may not collect fees monthly (for example, some collect quarterly).

How do you decide the best model for your foundation? The best way is to look at what other community foundations of similar sizes are doing and then discuss and weigh your options.

Ask Yourself

There are no recommended guidelines, but you do need to consider varying factors when establishing an administrative fee pricing structure:

What is the best way to determine our administrative fee methodology and rates?
What administrative fees do our competitors charge for similar services?
How often should we revisit our administrative fees policy?
What costs are associated with taking on additional revenue-driven work?
What is our existing capacity? Would it be more cost-effective to hire additional in-house staff or outsource some processes?
Is interdepartmental coordination needed to set a reasonable policy on fees? (Often the finance and development departments set fees together.)

Trends in Administrative Fees

In 2001, two community foundation colleagues conducted a survey on administrative fees, issues, and trends (see the Resources section for more information). The colleagues sent the survey to community foundations, and 104 financial officers responded. The responses were segmented based on the size of the community foundations’ assets as follows:

15 percent in the $0–$25 million range
45 percent in the $25–$100 million range
25 percent in the $100–$500 million range
10 percent in the $500 million and above range

The colleagues presented the survey results at the 2001 Fall Conference for Community Foundations. Below are some survey highlights. Review this information and compare it with your community foundation’s current practices.

Most community foundations surveyed (75 percent) based their fees on fund type. Smaller community foundations were less likely to use a different fee per type of fund.
Almost half of those who responded used a tiered fee structure, charging a different fee for each tier. A tiered structure refers to price-break points (1 percent on the first $1 million, 0.75 percent on the next $1.5 million).
Seventy-five percent of respondents kept their investment fees separate from their administrative fees. Those who assessed an all-inclusive fee, which included investment management costs, found that it affected their operating budget because the investment management fees were then paid from the operations budget.
Most community foundations (59 percent) used a different fee for endowed funds than for non-endowed funds.
For endowed funds, more community foundations assessed administrative fees quarterly (60 percent) as opposed to annually (15 percent), monthly (20 percent), or other timeframes (5 percent).
For non-endowed funds, most community foundations assessed administrative fees quarterly (45 percent), followed by monthly (25 percent), annually (15 percent), or some other method (15 percent).
Of those surveyed, 21 percent charged fees on deferred gifts: Most assess an ongoing fee (92 percent) while some charged a fee when the deferred gift was created (36 percent).
Seventy-five percent of community foundations kept the interest earned on the account balance of funds segregated for payout.
Community foundations do not often offer consolidated fees for donors with multiple funds—only 14 percent of foundations did so.

Frequently Asked Questions

What factors should we consider when determining our administrative fee structure?

Administrative fees can be established by examining your local market conditions, competitive forces, and the cost of doing business. Ask yourself:

Who are our competitors? What do they charge for products and services?
How can we communicate the value added for our administrative fees? (Contact the Council on Foundations for samples of what other foundations charge for administrative fees.)
How much does it cost us to provide these services (including fixed and variable costs, such as labor, overhead, facilities, marketing, and development)?

When determining a fair and equitable fee structure, you should study the complexity of specific fund types and the support they require. Keep in mind that administering fees can consume a significant amount of staff time. As one community foundation colleague said, “Sometimes foundations make deals (exception pricing) to bring the dollars through the door, but they’ve got to be sure they have the in-house ability to administer them.” If you don’t have the staff capacity, consider keeping your fee structure simple.

How do community foundations charge based on fund activity?

According to the 2001 survey, only 9 percent of community foundations charged administrative fees based on activity (that is, by transaction). For example, a community foundation might charge based on the number of grants or number of contributions.

Eighteen percent of community foundations charged for enhanced services, such as:

offering unique investment management options
developing a Request For Proposal (RFP) for a fund
administering an S-Corp
managing committees
administering scholarships
assisting with fundraising or technology
researching or evaluating grants

Enhanced services, while expensive, are an opportunity to earn additional revenue for service. When offering enhanced services, community foundations often charged donors based on the actual time they spent on each activity.

According to a 2006 Foundation Strategy Group study of community foundations, some services are more costly than others. For example, the average annual cost to community foundations for scholarships was almost $20 per $1,000 in assets—the most costly of any fund type.

To “break even,” how much should we charge on our funds?

Many community foundations maintain a traditional fee ceiling of 1 percent. Below are some factors to consider when determining what fee you’ll need to charge to cover your costs:

Degree of customization allowed or encouraged by the foundation. Unique processes in response to one-time donor requests add significant costs to all funds and divert staff attention from activities that serve a broader base of donors.
Average fund size in each product category. In some foundations, the fees from exceptionally large funds may subsidize many small funds.
Level of transactions associated with funds in each product area. Higher levels of gift and grant activity can lead to additional costs unless processes are streamlined, automated, or standardized.
Degree of enhanced services provided by the foundation. Managing committee processes, creating special RFPs for certain funds, or offering unique investment management options are all enhanced services. While foundations can use enhanced services to earn additional revenue, few foundations generate revenue from these services in a systematic way.
Pricing and discounts from published pricing. Higher effective fees, particularly for large funds at or above 1 percent of assets, are often necessary to earn enough revenue to cover costs.

Do most community foundations charge minimum fees on funds?

Community foundations charge minimum fees to avoid losing money on smaller funds. Some foundations charge minimums only on donor-advised, non-endowed funds or other funds from which the donor may spend money on a quick turnaround. Rather than establishing a minimum fund size, some opt to charge a minimum administrative fee per fund.

In the 2001 survey, fewer than half of survey respondents (46 out of 104) charged a minimum fund fee. Minimum fees ranged from $100 to $700, the most common being between $100 and $250.

Should we charge additional fees for pass-through or spend-down funds?

A pass-through fund is a nonpermanent fund established by a donor, an agency, or an organized fundraising group. It is a short-term fund that often involves a fundraising campaign or event. Such events generate numerous gifts.

A spend-down fund is also a temporary fund, established with the intent of spending it within a certain timeframe. Spend-down funds can be a valuable service to the community; yet, these types of funds may demand the same, if not more, time and effort to administer as permanent funds. Therefore, some community foundations assess pass-through and spend-down funds with a higher fee structure (such as 3 or 5 percent), a minimum fee (such as $500), or a transaction-based price.

To determine the appropriate fees for such funds, examine how much support your foundation must give to administer the funds and conduct a cost-benefit analysis.

How should we charge fees for administering supporting organizations?

The purpose and activity of supporting organizations can vary greatly, making it difficult to set one fee across the board. Some community foundations incur greater costs than they receive in fees. For this reason, they offset costs by charging higher fees than other funds, such as:

market value plus activity fee
market value plus minimum fee
a customized fee schedule based on the service required

Almost half of the community foundations surveyed in the 2001 study charged fees to supporting organizations based on market value. Those that did not charge based on market value based their fee schedules on activity or time worked.

Should we charge fees on endowment funds if the value drops below the original principal?

In the survey, community foundations agreed that they should continue to charge administrative fees, even if a fund’s market value dropped below the contributed amounts. Below are three quotes from financial officers at community foundations:

"Administrative fees aren’t based on the performance of the fund. We don’t increase fees when the market is good and can do ourselves harm by not charging what our services are worth.”

“Even though fund values decrease, there are still administrative costs associated with them, and those costs are not going away.”

“A fee is a fee is a fee. They are what keeps us open and providing the service we do.”

Community foundations should indicate in their fund agreements whether fees (for example, investment and administrative fees) will be charged on endowment funds that are below their historic dollar value. If such a provision is not part of a fund agreement, community foundations must engage their legal counsel to determine whether their state’s version of the Uniform Management of Institutional Funds Act (and the revised Uniform Prudent Management of Institutional Funds Act) allows spending for fees from underwater funds (individual endowment accounts whose market values are below their historic dollar value).

Should we allow a grace period to let the fund grow before we charge a fee on new and/or small funds?

Community foundations offered some caution about omitting fees on certain funds. “Not charging fees on new or small funds can cause problems down the road,” said one financial director. “It’s hard to explain to a donor or agency why your services used to be free (had no value), and now they’re not.” It may be better to make the case from the start that the community foundation is providing valuable services and should be compensated accordingly.

Also, consider this: If you don’t charge fees on all funds, some funds (those with fees) are essentially subsidizing others. This may be difficult to explain to those donors whose fees are paying for other funds.

So what’s the bottom line? “Be consistent,” said one community foundation colleague. “Factor in the long-term needs of your foundation and be able to make a case for what you decide.”

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Accounting for Agency Endowment Funds Held at Community Foundations

council-webteam — Sat, 16 Nov 2013 18:05:21 +0000

Accounting for Agency Endowment Funds Held at Community Foundations council-webteam Sat, 11/16/2013 - 13:05

Accounting for Agency Endowment Funds Held at Community Foundations

Introduction

Nonprofits place their endowment funds with community foundations for a variety of reasons, including investment expertise, efficiencies, and access to planned giving advice and services. As nonprofit organizations seek to place their assets and partner with the foundation, questions arise as to the appropriate accounting for this relationship.

The purpose of this article is to provide nonprofits with a possible solution for accounting for their interest in the endowment funds placed with community foundations. As is always the case, each nonprofit organization should consult with its own auditors in determining the best solution for its needs. It should be noted that this paper speaks only to the accounting for endowment funds created at a community foundation by a nonprofit organization with its own endowment dollars. Donor-designated funds held by a community foundation, which come directly to the community foundation from a donor and not through the nonprofit, are not covered.

Existing Guidance

In June 1999, The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others (FAS 136). FAS 136 provides guidance for accounting in the case where a “resource provider” (nonprofit organization) transfers assets to a community foundation, but specifies itself or its affiliate as the beneficiary of the assets. The transaction is deemed to be reciprocal because at the time of the transfer, the nonprofit organization expects to receive future distributions because it specifies itself as a beneficiary, and by acceptance of the transfer, the community foundation agrees to make distributions to the nonprofit organization. Because the transaction is deemed to be reciprocal, the nonprofit organization should recognize an asset and the community foundation should recognize a liability. The nonprofit is transferring its asset to the community foundation in exchange for future distributions. The community foundation, by its acceptance of the transfer, agrees that at the time of the transfer distributions to the nonprofit are capable of fulfillment and consistent with the foundation’s mission.

Accounting Entries

Example #9 in FAS 136 demonstrates that upon the transfer of assets to a community foundation, the nonprofit organization would recognize an asset on its books as a beneficial interest in assets held by the community foundation. Therefore, the following entry would be made upon transfer:

Creation of the Fund
Dr. Beneficial Interest in Assets Held by Community Foundation
Cr. Cash

(Assets and net assets are measured at present value based on the expected future cash flows to the nonprofit [generally measured by the fair value of assets transferred to the community foundation, unless facts and circumstances indicate that the fair value of the assets transferred to the community foundation differs from the present value of the expected future cash flows.])

Source of Nonprofit Funds:
If the net assets transferred are from the nonprofit’s operating surplus (Unrestricted Net Assets), then the net assets will need to be transferred to Permanently Restricted Net Assets on the nonprofit’s books. The nonprofit would show a reclassification of net assets from Unrestricted to Permanently Restricted on the Statement of Activities.

If the net assets transferred are derived from donor-restricted endowment funds contributed to the nonprofit, the nonprofit should first ensure that the transfer of the net assets will not violate the contract between the nonprofit and the donor. If the transfer will not violate such contract, then no reclassification of net assets will be necessary, as the net assets should already be classified as permanently restricted on the nonprofits book.

Less guidance is given on the proper treatment of changes in value of and distributions from the assets held at the community foundation to the nonprofit throughout the life of the fund agreement.

The nonprofit’s interest in the endowment fund at the community foundation is similar in nature to an interest in a perpetual trust in that the nonprofit organization has an interest in a future income stream from the trust. As with a perpetual trust, the nonprofit organization generally does not have access to the principal value of the assets held in the community foundation endowment fund under the terms of the fund agreement.

Based on the premise that a nonprofit endowment fund is like a perpetual trust, the following accounting entries would be made throughout the life of the fund to account for the changes in value and distributions from the assets held at the community foundation:

Income Payments During the Period
As the community foundation makes distributions of income back to the nonprofit organization, the following entries are made on the nonprofit’s books.

Dr. Cash
Cr. Investment Income (Unrestricted)

(Distribution received from assets held at community foundation)

Periodic Valuation

Changes in value of the endowment fund at the community foundation would be captured on the nonprofit’s books as follows:

Dr. Beneficial Interest in assets held at Community Foundation
Cr. Gain or Loss (Permanently Restricted)

(To adjust for changes in present value of expected cash flows – debit and credit could be reversed.)

Presentation and Disclosure

As shown above in the Accounting Entries, the nonprofit would show an asset on its balance sheet equal to the interest in the fund held at the community foundation. Because the fund agreement limits the nonprofit’s access to the endowment assets at the community foundation, the net assets related to the interest in the fund would be classified as permanently restricted.

In addition, the nonprofit should disclose the following in its financial statements:

1. The identity of the community foundation,

2. Whether variance power was granted to the community foundation and, if so, a description of the terms of the variance power,

3. The terms under which the community foundation will distribute amounts to the nonprofit, and

4. The aggregate amount reported in the statement of financial position and how that amount is described.

Statement of Financial Accounting Standard No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others (FAS 136), Appendix A, page 21, Example #9, paragraph #56.

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Rules Governing Non-Component Funds

council-webteam — Mon, 11 Nov 2013 20:14:00 +0000

Rules Governing Non-Component Funds council-webteam Mon, 11/11/2013 - 15:14

Rules Governing Non-Component Funds

Historical background of non-component and donor-directed funds.

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Creating an Inactive Funds Policy

council-webteam — Fri, 08 Nov 2013 22:09:04 +0000

Creating an Inactive Funds Policy council-webteam Fri, 11/08/2013 - 17:09

Creating an Inactive Funds Policy

Imagine the following scenarios:

A donor advisor has not made a recommendation from a donor advised fund for two years.
An agency has requested that your community foundation not make a distribution from an agency endowment until the agency requests a distribution at some point in the future.
A fiscal sponsorship project has lost momentum and the funds are sitting unused.

Do you have a policy that guides how your community foundation handles these situations? If not, now is the time to put one in place.

Why should a community foundation have an inactive funds policy?

The Council recommends establishing an inactive funds policy for a number of reasons. First, a policy helps guide the community foundation’s responses to scenarios like those described above and allows the community foundation to provide a consistent message to fundholders. Second, a policy helps ensure that the funds at the community foundation are actively benefitting the community. Third, a policy helps address policymakers’ concerns about funds that do not make periodic distributions—concerns which have prompted some to propose solutions such as mandatory payout requirements for donor advised funds.

As one indication of policymakers’ interest in this issue, the IRS’s Donor-Advised Funds Guide Sheet, used by IRS personnel reviewing applications for new charities with donor advised fund programs, asks whether there are provisions in fund agreements for investments and distributions if a donor’s account is inactive. The guide sheet instructions explain that the question seeks to address the issue of whether the organization has a provision to ensure continuation of distributions. Regarding a related question, which asks whether the organization requires an annual minimum distribution from a fund, the instructions state, “[w]ithout a mechanism to ensure that distributions from donors’ accounts or funds are distributed, the organization may not be able to describe how it intends to fulfill its tax exempt purpose.” While the Council does not advocate for a fund-by-fund payout requirement, we do believe that an inactive funds policy addresses some of the concerns that prompt policymakers’ discussions about such payout requirements.

What should an inactive funds policy include?

The policy may be brief, but should include several basic elements: statement of applicability, definition of an inactive fund, guidelines for how inactive funds will be handled, and any exceptions to the policy.

Applicability

While many inactive funds policies focus on donor advised funds, such policies should cover all funds.

Definition of an Inactive Fund

Inactivity is often defined as a period in which there is an absence of grant recommendations. The period of inactivity that qualifies a fund as being “inactive” varies among community foundations but often falls within the 2–5 year range. In the commercial donor advised fund context, the IRS’s actions indicate that they believe 3 years is an appropriate time period. A policy that allows a fund to remain inactive or dormant for more than 5 years will not likely be looked on favorably by regulators since 5 years is a long period for no distributions to be made from a fund.

Procedures

While community foundations typically make periodic attempts to discuss the issue of inactivity with fundholders before the fund reaches the inactive status, most policies will first require the community foundation to make at least one attempt to contact fund representatives to discuss the intentions of the fund once a fund has officially become “inactive.” The second step of a policy will typically provide that if no activity occurs after a brief period following the last attempted contact, the community foundation will proceed with foundation-directed distributions from the fund.

Foundations vary with regard to what then happens to the fund. Some community foundations make a distribution from the fund to an unrestricted fund, in accordance with the fund’s spending policy. Caution should be used to assure that any legal restrictions placed on the fund by donors to the fund are honored. In the case of advised funds, other policies provide that the separately named donor advised fund is terminated and the assets in that fund are transferred to the community foundation’s general community fund.

Exceptions

A comprehensive policy will also provide a route for fundholders to allow the accumulation of funds for investment in a long-term charitable goal; for example, the establishment of a larger grant for a capital project if approved by the community foundation. If a fundholder wants the fund to accumulate assets for a specific purpose, it is prudent to document the purpose; an effective approach to documentation is to have the fundholder submit a written request outlining the charitable goal and a timeline for reaching that goal. With such a request in place, the community foundation would retain the authority to approve an exception to the inactive funds policy for that particular, long-term charitable goal. By establishing such a process, the community foundation can show that it has active oversight of the funds and that a plan is in place for the use of the funds even if they are not being immediately distributed.

Where should the inactive funds policy be located?

Options for placement include fund agreements, fund guidelines, or a separate policy. While the IRS’s guide sheet on donor advised funds suggests that IRS agents look for the policy in fund agreements, placing the policy terms in an agreement may reduce a foundation’s flexibility if its policy changes. Instead, it may be prudent to include such a policy in the fund guidelines or in a separate policy which could be referenced within the fund agreement (e.g., “This fund is subject to the Community Foundation’s policy on Inactive Funds, which may change from time to time.”)

Of course, a policy alone is not sufficient; the community foundation also needs to establish systems for following the policy. In creating or reviewing your foundation’s inactive funds policy, you have some flexibility, so think through its implementation as well. Finally, as with any significant policy, working with your local counsel will ensure that your policy meets the needs of your foundation without raising other concerns.

Questions?

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