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Charitable Foundations can add to your asset base in novel ways
Foundations in the United States
The two key types of foundation in the United States are private foundations and public charities (sometimes
referred to as “public foundations”). The categories derive from where the money comes from rather than
where it goes. Private foundations are set up by wealthy individuals, families, and companies, with additional
money also coming in from donations by parent companies to corporate foundations, returns on an invested
endowment, and from company shares. By contrast, public charities derive their support from diverse sources,
which may include individuals, private foundations, government agencies, and returns on their invested
endowments.
Private foundations make grants to good causes, invariably those dear to their founder(s) and/or board
members. Public charities will typically deliver services rather than make grants. Private foundations offer lower
tax relief to donors than their public charity counterparts and, also unlike these counterparts, must pay out 5
percent annually and a 2 percent tax on net investment income. They also face more mandatory paperwork.
The central public charities of interest here are community foundations. These typically do not deliver services
but instead make grants (the money is the return on their investment of money donated by individuals).
Such foundations are ideal for those wealthy individuals that do not want to go down the private foundation
route, whether because they are less keen for the control and recognition that goes with a private foundation,
or because the administrative costs of setting up a completely new foundation (rather than a fund within a
community foundation) would be high in relation to the amount they wished to donate.
Community foundations largely consist of:
• Donor Advised funds, where the foundations own and invest the money but the donor and/or their friends
and relatives advise on the recipients of grants made from the interest on the investments;
• Field of Interest funds, where the donor indicates a broad area they wish to support; and
• Unrestricted funds, where the community foundation boards and staff are trusted to dispense the
donations that come from different people and organizations.
Community foundations often have a volunteer internal investment committee (note the use of “volunteer”) that
makes recommendations on how investments will be managed, including selection and performance review of
investment firms. 85 These can also invest money on behalf of assets, including, a little confusingly, ones with the
word foundation in their title. Among the asset-related endowments held by community foundations in the case
study areas are the Friends of the St. Paul Public Library, which has a $13 million endowment, and the $2 million
PARK Program Maintenance Endowment Fund, created by the Detroit Pistons professional basketball franchise.
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So, for example, at the Hudson-Webber Foundation in Detroit, members of the Investment Management Committee include the CFO of DTE and a PWC ex-managing
partner. Board recommendations are executed by investment management companies, which may range from ones with offices just in the state (e.g. Minnesota-based
Mairs and Power) through to national-wide firms (e.g. New England Pension Consultants) and international companies (e.g. Cambridge Associates).
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