Section of the Internal Revenue Code that designates an organization as charitable and tax-exempt. Organizations qualifying under this section include religious, educational, charitable, amateur athletic, scientific or literary groups, organizations testing for public safety or organizations involved in prevention of cruelty to children or animals. Most organizations seeking foundation or corporate contributions secure a Section 501(c)(3) classification from the Internal Revenue Service (IRS).
Note: The tax code sets forth a list of sections-501(c)(4-26)-to identify other nonprofit organizations whose function is not solely charitable (e.g., professional or veterans organizations, chambers of commerce, fraternal societies, etc.).
A voluntary report published by a foundation or corporation describing its grant activities. It may be a simple, typed document listing the year’s grants or an elaborately detailed publication. A growing number of foundations and corporations use an annual report as an effective means of informing the community about their contributions activities, policies and guidelines. (The annual contributions report is not to be confused with a corporation’s annual report to the stockholders.)
Gifts of securities include publicly traded stocks, but also mutual funds, Treasury Bills, notes and closely held stock. The gift of appreciated securities held for at least one year allows a donor a charitable deduction for the market value of the gift, avoiding the payment of capital gains tax.
Articles of Incorporation
A document filed with the secretary of state or other appropriate state office by persons establishing a corporation. This is the first legal step in forming a nonprofit corporation.
Cash, stocks, bonds, real estate or other holdings of a foundation. Generally, assets are invested and the income is used to make grants. (See Payout Requirement.)
One one-hundredth of a percent (0.01 percent); 2 percent is equal to 200 basis points. A term commonly used to measure returns, earnings and fees paid to investment managers.
A sum of money made available upon the donor’s death.
Rules governing the operation of a nonprofit corporation. Bylaws often provide the methods for the selection of directors/trustees, the creation of committees and the conduct of meetings.
Also referred to as a Capital Development Campaign, a capital campaign is an organized drive to collect and accumulate substantial funds to finance major needs of an organization such as a building or major repair project.
Grant to provide funding for buildings, construction or equipment, rather than program or operating expenses.
A grant that is made on the condition that other monies must be secured, either on a matching basis or via some other formula, usually within a specified period of time, with the objective of stimulating giving from additional sources.
Charitable Gift Annuity
A gift of cash or securities in exchange for the promise of lifetime income, now or later. A charitable gift annuity is a contract between the donor and charity that is part charitable gift and part purchase of an annuity. The total assets of the charity back the payments.
Charitable Lead Trust
A Charitable Lead Trust (CLT) pays the trust income to a charity first for a specified period, with the principal reverting to the donor or going to other person(s) at the end of the period. Also called Income Trust.
Charitable Remainder Trust
A gift plan that provides income to one or more beneficiaries for their lifetimes, a fixed term of not more than 20 years, or a combination of the two. Assets, usually cash, securities or real estate, are transferred to a trust which pays income to the beneficiaries for the term of the trust. When the trust term ends, the remainder in the trust passes to the charity. Can be established as a Charitable Remainder Annuity Trust (CRAT) with a fixed payout or as a Charitable Remainder Unitrust (CRUT) with a variable payout.
In its traditional legal meaning, the word “charity” encompasses religion, education, assistance to the government, promotion of health, relief of poverty or distress and other purposes that benefit the community. Nonprofit organizations that are organized and operated to further one of these purposes generally will be recognized as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (see 501(c)(3)) and will be eligible to receive tax-deductible charitable gifts.
A community foundation is a tax-exempt, nonprofit, autonomous, publicly supported, philanthropic institution composed primarily of permanent funds established by many separate donors for the long-term diverse, charitable benefit of the residents of a defined geographic area. Typically, a community foundation serves an area no larger than a state. Community foundations provide an array of services to donors who wish to establish endowed funds without incurring the administrative and legal costs of starting independent foundations. There are more than 500 community foundations across the United States today. The Cleveland Foundation is the oldest.
A community foundation that is incorporated as a nonprofit corporation. Investment management of assets held by the corporation is the responsibility of the managers or board of the foundation. A community foundation may include both a corporate entity and component trusts. (See Trust Form.)
Corporate Giving Program
A corporate giving (direct giving) program is a grantmaking program established and administered within a profit-making company. Gifts or grants go directly to charitable organizations from the corporation. Corporate foundations/giving programs do not have a separate endowment; their expense is planned as part of the company’s annual budgeting process and usually is funded with pre-tax income. The Foundation Center has identified more than 700 corporate foundations/giving programs in the United States; however, it is believed that several thousand are in operation.
Also referred to as Denial, a decline is the refusal or rejection of a grant request. Some declination letters explain why the grant was not made, but many do not.
A multi-year grant that becomes smaller each year, in the expectation that the recipient organization will increase its fundraising from other sources.
A grant made to establish an innovative project or program that will serve as a model, if successful, and may be replicated by others.
A type of restricted fund in which the fund beneficiaries are specified by the grantors.
Grant funds distributed at the discretion of one or more trustees, which usually do not require prior approval by the full board of directors. The governing board can delegate discretionary authority to staff.
As applied to public charities, the term disqualified person includes (1) organization managers, (2) and any other person who, within the past five years, was in a position to exercise substantial influence over the affairs of the organization, (3) family members of the above, and (4) businesses they control. Paying excessive benefits to a disqualified person will result in the imposition of penalty excise taxes on that person, and, under some circumstances, on the charity’s board of directors (See Intermediate Sanctions.)
An attempt to minimize risk by distributing assets among various asset classes or among managers within the same asset class who have different styles.
Donor Advised Fund
A fund held by a community foundation where the donor, or a committee appointed by the donor, may recommend eligible charitable recipients for grants from the fund. The community foundation’s governing body must be free to accept or reject the recommendations.
Donor Designated Fund
A fund held by a community foundation where the donor has specified that the fund’s income or assets be used for the benefit of one or more specific public charities. These funds are sometimes established by a transfer of assets by a public charity to a fund designated for its own benefit, in which case they may be known as grantee endowments. The community foundation’s governing body must have the power to redirect resources in the fund if it determines that the donor’s restriction is unnecessary, incapable of fulfillment or inconsistent with the charitable needs of the community or area served.
The degree of prudence that might be properly expected from a reasonable person in the circumstances; applicable to foundation personnel who act in a fiduciary capacity. (See Fiduciary Duty.)
The principal amount of gifts and bequests that are accepted subject to a requirement that the principal be maintained intact and invested to create a source of income for a foundation. Donors may require that the principal remain intact in perpetuity, or for a defined period of time or until sufficient assets have been accumulated to achieve a designated purpose.
“Family foundation” is not a legal term, and therefore, it has no precise definition. Yet, approximately two-thirds of the estimated 44,000 private foundations in this country are believed to be family managed. The Council on Foundations defines a family foundation as a foundation whose funds are derived from members of a single family. At least one family member must continue to serve as an officer or board member of the foundation, and as the donor, they or their relatives play a significant role in governing and/or managing the foundation throughout its life. Most family foundations are run by family members who serve as trustees or directors on a voluntary basis-receiving no compensation; in many cases, second- and third-generation descendants of the original donors manage the foundation. Most family foundations concentrate their giving locally, in their communities.
The legal responsibility for investing money or acting wisely on behalf of another. Managers of charitable entities have fiduciary obligations to the charity. (See Due Diligence.)
Field of Interest Fund
A fund held by a community foundation that is used for a specific charitable purpose such as education or health research.
An accounting statement detailing financial data, including income from all sources, expenses, assets and liabilities. A financial report may also be an itemized accounting that shows how grant funds were used by a donee organization. Most foundations require a financial report from grantees.
Main source of financial information to persons outside the organization. These convey to management and to interested outsiders a concise picture of the profitability and financial position of the organization.
Contributions to a foundation that are used primarily for direct grantmaking, rather than for endowing the foundation permanently. Most corporate foundations depend on these funds each year rather than on income produced from endowment funds.
A private nonprofit organization with funds and a program managed by its own trustees and directors, established to further social, educational, religious or other charitable activities by making grants. A private foundation receives its funds from, and is subject to control of, an individual family, corporation or other group of limited number.
An entity established for the purpose of accounting for resources used for specific activities or objectives in accordance with special regulations, restrictions or limitations. Community foundation assets are held in many named component funds established by donors or the foundation for specific or unrestricted purposes. Each fund has its own chart of accounts and every transaction is accounted for at the fund level.
A chronological pattern of proposal review, decision making and applicant notification. Some donor organizations make grants at set intervals (quarterly, semi-annually, etc.), while others operate under an annual cycle.
Future Interest Property
The donor gives remainder interest in a personal residence, vacation home or farm, subject to the right to live in the home (or work the farm) for the lifetime of the donor and/or another person. (See Retained Life Estate. )
The overall picture of the types of projects and programs that a donor has supported historically. The past record may include areas of interest, geographic locations, dollar amount of funding or kinds of organizations supported.
An award of funds to an organization or individual to undertake charitable activities.
The ongoing assessment of the progress of the activities funded by a donor, with the objective of determining if the terms and conditions of the grant are being met and if the goal of the grant is likely to be achieved.
The individual or organization that receives a grant.
The individual or organization that makes a grant.
Efforts to raise money from individuals or groups from the local community on a broad basis. Usually an organization does grassroots fundraising within its own constituency – people who live in the neighborhood served or clients of the agency’s services. Grassroots fundraising activities include membership drives, raffles, bake sales, auctions, dances and a range of other activities. Foundation managers often feel that successful grassroots fundraising indicates that an organization has substantial community support.
A statement of a foundation’s goals, priorities, criteria and procedures for applying for a grant.
A donation of goods or services rather than cash or appreciated property.
These private foundations are usually founded by one individual, often by bequest. They are occasionally termed “nonoperating” because they do not run their own programs. Sometimes individuals or groups of people, such as family members, form a foundation while the donors are still living. Many large independent foundations, such as the Ford Foundation, are no longer governed by members of the original donor’s family but are run by boards made up of community, business and academic leaders. Private foundations make grants to other tax-exempt organizations to carry out their charitable purposes. Private foundations must make charitable expenditures of approximately 5 percent of the market value of their assets each year. Although exempt from federal income tax, private foundations must pay a yearly excise tax of 1 or 2 percent of their net investment income. The Rockefeller Foundation and the John D. and Catherine T. MacArthur Foundation are two examples of well-known “independent” private foundations.
Penalty taxes applied to disqualified persons of public charities (see Disqualified Person) that receive an excessive benefit from financial transactions with the charity. An excessive benefit may result from overcompensation for services or from other transactions such as charging excessive rent on property rented to the charity. Unlike private foundations, public charities are not barred from engaging in financial transactions with disqualified persons as long as the transaction is fair to the charity. Penalty taxes also may apply to organization managers, such as the charity’s board, that knowingly approve an excess benefit transaction.
Internal Revenue Service (IRS)
The federal agency with responsibility for regulating foundations and their activities. On-line at www.irs.gov.
Advisors who aid in the investment decisions of individuals and financial committees and officers of institutions. Investment consultants provide information and make recommendations about asset allocation, manager structure, manager review and portfolio performance.
An individual, firm or committee responsible for making day-to-day decisions to buy, hold, or sell assets. Also known as money managers or investment advisors.
An investment that risks the foundation’s ability to carry out its exempt purposes. Although certain types of investments are subject to careful examination, no single type is automatically a jeopardy investment. Generally, a jeopardy investment is found to be made when a foundation’s managers have failed to exercise ordinary business care and prudence. The result of a jeopardy investment may be penalty taxes imposed upon a foundation and its managers.
A grant project supported by more than one donor, each of whom may provide monies for a specific component of the overall project or who may contribute to a common pool of funds.
Letter of Intent
A grantor’s letter or brief statement indicating intention to make a specific gift.
A method of grantmaking practiced by some foundations. Leverage occurs when a small amount of money is given with the express purpose of attracting funding from other sources or of providing the organization with the tools it needs to raise other kinds of funds. Sometimes known as the “multiplier effect.
Claims on assets held, excluding ownership equity. For a foundation, payments outstanding for grants authorized and not yet paid or remaining grants to be paid over multiyear periods, are liabilities.
A type of foundation that restricts its giving to one or very few areas of interest, such as higher education or medical care.
Efforts to influence legislation by influencing the opinion of legislators, legislative staff and government administrators directly involved in drafting legislative proposals. The Internal Revenue Code sets limits on lobbying by organizations that are exempt from tax under Section 501(c)(3). Public charities (see Public Charity) may lobby as long as lobbying does not become a substantial part of their activities. Conducting nonpartisan analysis and research and disseminating the results to the public generally is not lobbying for purposes of these restrictions.
Matching Gifts Program
A grant or contributions program that will match employees’ or directors’ gifts made to qualifying educational, arts and cultural, health or other organizations. Specific guidelines are established by each employer or foundation. (Some foundations also use this program for their trustees.)
A grant or gift made with the specification that the amount donated must be matched on a one-for-one basis or according to some other prescribed formula.
Monies are received and distributed with little or no dollars remaining with the foundation.
A term describing the Internal Revenue Service’s designation of an organization whose income is not used for the benefit or private gain of stockholders, directors or any other persons with an interest in the company. A nonprofit organization’s income must be used solely to support its operations and stated purpose.
Also called private operating foundations, operating foundations are private foundations that use the bulk of their income to provide charitable services or to run charitable programs of their own. They make few, if any, grants to outside organizations. To qualify as an operating foundation, specific rules, in addition to the applicable rules for private foundations, must be followed. The Carnegie Endowment for International Peace and the Getty Trust are examples of operating foundations.
A contribution given to cover an organization’s day-to-day, ongoing expenses, such as salaries, utilities, office supplies, etc.
Philanthropy is defined in different ways. The origin of the word philanthropy is Greek and means love for mankind. Today, philanthropy includes the concept of voluntary giving by an individual or group to promote the common good. Philanthropy also commonly refers to grants of money given by foundations to nonprofit organizations. Philanthropy addresses the contribution of an individual or group to other organizations that in turn work for the causes of poverty or social problems-improving the quality of life for all citizens. Philanthropic giving supports a variety of activities, including research, health, education, arts and culture, as well as alleviating poverty.
Any gift given for any amount and for any purpose whether for current or deferred use, which requires the assistance of a professional staff person, a qualified volunteer or the donor’s advisors to complete. In addition, it includes any gift that is carefully considered by a donor in light of estate or financial plans.
A promise to make future contributions to an organization. For example, some donors make multiyear pledges promising to grant a specific amount of money each year.
A review of the results of a grant, with the emphasis upon whether or not the grant achieved its desired objective.
A brief draft of a grant proposal used to learn if there is sufficient interest to warrant submitting a proposal.
A nongovernmental, nonprofit organization with funds (usually from a single source, such as an individual, family or corporation) and program managed by its own trustees or directors, established to maintain or aid social, educational, religious or other charitable activities serving the common welfare, primarily through grantmaking. U.S. private foundations are tax-exempt under Section 501(c)(3) of the Internal Revenue Code and are classified by the IRS as a private foundation as defined in the code.
Also referred to as a corporate affairs officer, program associate, public affairs officer or community affairs officer, a program officer is a staff member of a foundation or corporate giving program who may do some or all of the following: recommend policy, review grant requests, manage the budget and process applications for the board of directors or contributions committee.
A nonprofit organization that is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and that receives its financial support from a broad segment of the general public. Religious, educational and medical institutions are deemed to be public charities. Other organizations exempt under Section 501(c)(3) must pass a public support test (see Public Support Test) to be considered public charities, or must be formed to benefit an organization that is a public charity (see Supporting Organization). Charitable organizations that are not public charities are private foundations and are subject to more stringent regulatory and reporting requirements (see Private Foundation).
Public foundations, along with community foundations, are recognized as public charities by the IRS. Although they may provide direct charitable services to the public as other nonprofits do, their primary focus is on grantmaking. To be eligible for membership in the Council, a public foundation must grant at least $60,000 yearly and must dedicate at least 50 percent of its organizational budget to a competitive grantmaking program.
Public Support Test
There are two public support tests, both of which are designed to ensure that a charitable organization is responsive to the general public rather than a limited number of persons. One test, sometimes referred to as 509(a)(1) or 170(b)(1)(A)(vi) for the sections of the Internal Revenue Code where it is found, is for charities like community foundations that mainly rely on gifts, grant, and contributions. To be automatically classed as a public charity under this test, organizations must show that they normally receive at least one-third of their support from the general public (including government agencies and foundations). However, an organization that fails the automatic test still may qualify as a public charity if its public support equals at least 10 percent of all support and it also has a variety of other characteristics-such as a broad-based board-that make it sufficiently “public.” The second test, sometimes referred to as the section 509(a)(2) test, applies to charities, such as symphony orchestras or theater groups, that get a substantial part of their income from the sale of services that further their mission, such as the sale of tickets to performances. These charities must pass a one-third/one-third test. That is, they must demonstrate that their sales and contributions normally add up to at least one third of their financial support, but their income from investments and unrelated business activities does not exceed one-third of support.
Also referred to as a letter of inquiry, this is a brief letter outlining an organization’s activities and a request for funding sent to a prospective donor to determine if there is sufficient interest to warrant submitting a full proposal. This saves the time of the prospective donor and the time and resources of the prospective applicant. (See Preliminary Proposal.)
The date the contribution was credited to the account by YSCF for tax purposes.
Assets or income that is restricted in its use, in the types of organizations that may receive grants from it or in the procedures used to make grants from such funds.
Retained Life Estate
The donor gives remainder interest in a personal residence, vacation home or farm, subject to the right to live in the home (or work the farm) for the lifetime of the donor and/or another person. Also known as Future Interest Property.
Established to provide support for individuals who are pursuing some training or educational opportunity. Grants may be awarded to the individuals or they may be awarded to educational institutions.
A grant or contribution used to start a new project or organization.
Visiting a donee organization at its office location or area of operation and/or meeting with its staff or directors or with recipients of its services.
Also referred to as ethical investing and socially responsible investing, this is the practice of aligning a foundation’s investment policies with its mission. This may include making program related investments and refraining from investing in corporations with products or policies inconsistent with the foundation’s values.
An agreed-upon policy that determines what percentage of a group of assets, such as an endowment, should be spent to cover both operating costs and grants of an institution. Typical spending rules combine calculations based on previous years’ spending, the current year’s income and investment return rates and the policy of the foundation covering grant commitments.
The designation, in writing by a donor, of a person to be assigned the rights and duties associated with the donor’s account at the Charitable Gift Fund upon the donor’s death. Successors are eligible only after the deaths of all donors named on the account. The donor designates an individual as the successor, or the donor may choose to recommend that one or more charitable organizations receive the proceeds of any remaining units in the account upon the donor’s death.
A supporting organization is a charity that is not required to meet the public support test because it supports a public charity. To be a supporting organization, a charity must meet one of three complex legal tests that assure, at a minimum, that the organization being supported has some influence over the actions of the supporting organization. Although a supporting organization may be formed to benefit any type of public charity, the use of this form is particularly common in connection with community foundations. Supporting organizations are distinguishable from donor-advised funds because they are distinct legal entities.
Organizations that do not have to pay state and/or federal income taxes. Organizations other than churches seeking recognition of their status as exempt under Section 501(c)(3) of the Internal Revenue Code must apply to the Internal Revenue Service. Charities may also be exempt from state income, sales and local property tax.
Operational or management assistance given to a nonprofit organization. It can include fundraising assistance, budgeting and financial planning, program planning, legal advice, marketing and other aids to management. Assistance may be offered directly by a foundation or corporate staff member or in the form of a grant to pay for the services of an outside consultant. (See In-Kind Contribution.)
The situation that occurs when a gift or grant is made that is large enough to significantly alter the grantee’s funding base and cause it to fail the public support test. Such a gift or grant results in “tipping” or conversion from public charity to private foundation status.
A legal device used to set aside money or property of one person for the benefit of one or more persons or organizations.
(1) A board member of a foundation. Trustees are responsible for setting foundation policy and making fund decisions. (2) An individual or corporation named to administer the terms of a trust document.
A community foundation made up of multiple forms.