Investing in Causes

May 1, 2009

(Article originally published in Business New Hampshire Magazine, May, 2009)

In this economy, it seems it’s difficult to invest in anything worthwhile, particularly if you want to see your investment grow. But for those inclined toward philanthropy, the best way to successfully invest wealth these days may be, as Gandhi famously encouraged, to fund the change you want to see in the world. Targeting wealth toward philanthropic goals is like providing venture capital that can spark and enable innovations in science, religion, social welfare, education or the arts. There are many ways to strategically invest for the greater good, including investing in donor advised funds and donating funds to worthy existing charities. Another way to get active in your charitable investments is to create, finance and manage a private, family foundation.

A donor can establish a lasting legacy and have a targeted effect not only now but in the future through a private foundation. Consider the Agahozo-Shalom Youth Village in Rwanda, which opened in December 2008 to serve children orphaned as a result of the Rwandan genocide. The project was sparked by a 2005 dinner conversation between Anne Heyman, a New York businesswomen and philanthropist, and Paul Rusesabagina, the subject of the movie “Hotel Rwanda.” Heyman and her husband established a family foundation to create the Rwandan youth village based on the Israeli Yemin Orde Youth Village model that became famous after the Holocaust. In just three years, Heyman transformed vision to reality.

Private foundations are charitable entities established to achieve specified charitable purposes. Some foundations actively engage in charitable work and are called operating foundations. Most private foundations are non-operating foundations and make grants to support their charitable purposes. A foundation may be structured so that it is managed and operated by the donor and the donor’s family. These family foundations are excellent vehicles for achieving positive outcomes, including engendering and cultivating philanthropic values in the next generation.

There is no minimum and no consensus on the appropriate size of a private foundation. A rule of thumb for a private foundation is that the foundation should have a sizable endowment with earnings (or corpus) to support $100,000 each year and additional funds to support operations. This is an appropriate metric for private foundations that are “stand-by” foundations, those that endowed to make annual contributions during the donor’s lifetime and a major bequest upon the donor’s death (or termination of a trust). But it may be of little relevance to a private foundation established to provide modest grants, like annual academic scholarships.

The Financial Advantage

A donor may deduct donations to a private, non-operating foundation in an amount not exceeding 30 percent of his or her annual adjusted gross income. If donations exceed the annual limit, they may be carried forward for up to five years. The deductible value of donations of property, other than cash or certain stock, generally is the donor’s cost basis in such property.

Donations of appreciated stock owned for at least one year are valued at the fair market value of the stock as of the date of the donation, but deductibility of the value of donated stock is capped at 20 percent of the donor’s adjusted gross income (with a five-year carry-forward for excess deductions). A donor avoids paying capital gains tax on any stock appreciation. Also, under federal estate tax law, contributions by an estate to a charitable family foundation are fully deductible.

Foundation Rules

Private, non-operating foundations are subject to a number of rules. A private foundation must:

  • Pay a federal excise tax of 1 to 2 percent on annual realized gains and income;
  • Make qualifying distributions of 5 percent of the foundation’s gross asset value (A qualifying distribution includes any payment to a public charity or an operating foundation and may include grants to international charities, support for scientific research, emergency and scholarship grants to individuals, loans to nonprofits and purchases of assets such as artwork for public display.);
  • File annual informational tax returns;
  • Make grants to individual recipients based on objective, non-discriminatory criteria that align with the foundation’s charitable purposes.

A private foundation must not:

  • Hold more than 20 percent of the voting stock of any corporation, public or private;
  • Invest in highly speculative investments;
  • Engage in transactions with disqualified people (including foundation managers, donors and people that own more than 20 percent of the stock of a substantial contributor);
  • Engage in lobbying or attempt to influence legislation or the outcome of any election.

Private foundations usually are established as nonprofit, non-stock corporations. Some foundations are organized as charitable trusts. In either case, the private foundation must qualify as a tax-exempt organization under federal law by filing an application for tax exemption (Form 1023) with the Internal Revenue Service.

The foundation’s organizing documents must establish its charitable purposes. Many major, non-operating foundations have generally stated charitable purposes that allow grant making in virtually any charitable field. Some foundations have charitable purposes that more precisely define the areas of interest for grant making. These interest areas may be broad, such as ending world hunger, or more narrow, such as providing scholarships to young NH women attending Harvard College. If a foundation is organized as a charitable trust, special care should be taken to establish appropriate charitable purposes because it generally is more difficult to amend a trust instrument than to amend articles of incorporation of a private foundation organized as a corporation.

Private foundations must have management and operating structures designed to achieve their charitable purposes. Boards of directors or trustees, whose members usually are chosen by the donor and, in the case of a family foundation, include donor family members, manage most private foundations.

Typically, foundation board members also serve as foundation officers. Larger foundations frequently have paid staff, while smaller foundations rely on accountants, attorneys and donor staff. Foundations of all sizes that are committed to innovative, sensitive grant making find that they need professional staff members, full- or part-time, with expertise in the field in which grants are to be made, in grant management and in public communications.

Despite the learning curve and administrative work involved, private foundations uniquely enable active engagement of donors and their families in positive, charitable outcomes. What dreams can you make operational?

MaryLiz Geffert is an attorney in the corporate department of McLane, Graf, Raulerson & Middleton, Professional Association, with offices in Concord, Manchester and Portsmouth, as well as Woburn, Massachusetts. She can be reached at 603-625-6464 or at For more information, visit