PO Box 116
219 S. Main
Smith Center, KS 66967
Information for Advisors
Four Commonly-Asked Questions
2. What is a "community foundation"? It is a pool of endowment funds for long-term support of charitable causes in and around one or more local communities. The SCCF is managed by a 13-member board of volunteer directors drawn from the Smith County area. The SCCF is an affiliate of the Greater Salina Community Foundation.
3. Isn't the United Way a community foundation? The United Way is geared toward short-term giving, whereas a community foundation, by design, is geared toward long-term giving. Also, the United Way operates from an annually re-generated asset base, whereas a community foundation operates from an endowed, permanent asset base. An editorial in the Hutchinson News gives perhaps the best characterization of this difference "Where the United Way fund operates as a community's checking account, the foundation acts as a community's savings account."
4. Won't a community foundation hurt Smith County's already-existing charities? A community foundation is not a place to give money, but rather a way to give money. It does not compete with or detract from other charities; on the contrary, it nurtures and enhances them. A community foundation has no programs of its own, and for that reason is often called a "conduit charity" or a "pass-through charity." In fact, a community foundation is so beneficial that existing charities will often use it as their own endowment arm.
Eight Reasons Why People Will Give to SCCF But Not to a Charity Directly
2. The “Independent Screen” Problem. There are several charities in this part of central Kansas large enough to have their own separate foundations. A college or university like Kansas State University is a good example. The college itself is a corporate entity, and its foundation is a wholly separate corporate entity. Typically, these “parallel” foundations are formed to provide an answer to the problem mentioned in the preceding paragraph. The argument goes: “You don’t have to worry about leaving a large amount to the college if you want to endow your gift, you can simply leave it to our separate foundation, which will administer it for the benefit of the college.” The problem, however, goes much deeper than this. In particular, some donors worry that the college may in fact control the “separate” foundation, such that if the college ever runs short, all it has to do is send someone across the hall and get a large check from the “separate” foundation. The beauty of the SCCF is that it provides donors with an independent screen. There is, in effect, a layer of insulation between the operating entity (i.e., the college, the hospital, or whatever) and the endowment entity. In short, the latter is not a “puppet” controlled by the former, and the mere existence of the SCCF as an independent screen encourages gifts that simply would not be made in its absence.
3. The “Disappearing Charity” Problem. Donors often worry that one or more of their favorite charities will someday close down, and that their gifts to those charities, intended to be permanent endowments, will simply disappear into the night. One needs to look no farther away than Salina, Kansas, to see a recent example of this Marymount College. To this day, it is still not clear what happened to all the gifts that had been made to Marymount College for permanent endowment. The SCCF provides a solution to this problem the donor may set up a donor-advised fund within the SCCF, from which fund annual payments are then made to one or more charities. The operative document gives the donor the right to request that, if a specified charity ever closes its doors, then its payments from the fund are to be diverted to one or more different charities. And there’s an ironic twist to this particular problem. If the fear that a charity may eventually disappear prevents donors from giving to that charity in the first place, then that very fear may well hasten the charity’s demise! The SCCF, by providing a “diversion” feature in that event, actually serves as an inducement for gifts that otherwise wouldn’t have been made, thereby helping to ensure the charity’s long-term existence.
4. The “Berkshire-Hathaway Problem.” The last decade has seen remarkable gains in the stock market. Many individuals hold stocks worth far more than they paid for them so much more, in fact, that they are disinclined to sell them for fear of incurring capital gains tax. A good example is Berkshire-Hathaway, the investment company headed by Warren Buffet. This publicly-traded stock is now selling for over $100,000 per share, and some were fortunate to acquire their shares for a fraction of that price. Many such individuals would like to use a share of their stock to make a charitable gift. But they rarely want to give $100,000 to just one charity. Typically, they’d like to split up the gift $10,000 to their church, $10,000 to a college, etc. But they can’t cut up their stock certificate with a pair of scissors! Until now, in order to split up their gift, the person had to sell the stock, incur the capital gains tax, and then give away the after-tax proceeds. Needless to say, the prospect of paying the tax has a dampening effect, and many times the gifts just don’t get made at all. But now, the SCCF affords a donor the chance to “split up” the stock. In particular, the donor can give the stock itself to the SCCF, which then sells the stock with no tax due whatever. The donor then requests that the SCCF distribute the proceeds to two, five, ten, or however many charities he or she wishes. The mere existence of the SCCF as a “conduit” or “pass-through” charity opens up charitable gifts that otherwise simply wouldn’t have been made at all.
5. The “Call-from-the-CPA” Problem. Donors sometimes receive last-minute telephone calls in December from their CPA or other tax preparer along the following lines: “You need to give away some money, and fast your taxable income is coming in way too high, and you need to make some cash contributions immediately.” The problem, however, is that the donor may be on his way out the door for the family’s annual skiing trip, and there’s simply not enough time to come up with the identities of the charitable recipients, much less their sharing ratios. Oftentimes, out of frustration over the time deadline, the contribution simply doesn’t get made at all. Note that this is the opposite of the “Berkshire-Hathaway” problem. There, the donor knew exactly the identities of the charities and their sharing ratios he simply had no way to divide the asset. Here, the asset (cash) is easily divisible the donor simply doesn’t know (at least yet) how he wants to divide it. Fortunately, the SCCF lets the donor make the gift now, and obtain the desired tax deduction now, but defer the identity/sharing ratio decisions until later. Thus, by offering the donor a “temporary parking place” for his contribution, the SCCF stimulates gifts that otherwise wouldn’t have been made at all.
6. The “Choice-of-Investment-Manager” Problem. In making gifts to a charity, donors sometimes prefer to donate securities on the condition that the charity will not sell those securities. Other donors prefer that the charity continue to use the donor’s own investment manager. Unfortunately for these donors, many charities do not allow such flexibilities, preferring instead to sell the contributed securities and manage the proceeds in accordance with their own investment policies. Unfortunately for these charities, their rigid policies sometimes prevent gifts from being made to them. The SCCF’s policy, however, is to permit a donor of $25,000 or more to request that his fund be managed and invested by a bank, trust company, brokerage firm, or other entity of the donor’s choice. By providing an arrangement by which the donor may remain loyal to his investment advisor, the SCCF induces gifts that otherwise wouldn’t have been made in its absence.
7. The “Cafeteria Line” Approach to Charitable Giving. It is very easy for a particular charity to “fail to get noticed” when it comes time for a donor to choose charitable beneficiaries. But by supporting and becoming a part of a community foundation, a charity effectively “gets its name out” and can actually attract donations that would not otherwise occur yet another example of how and why donors will give to a charity via the SCCF, whereas they might not have given to the charity directly.
8. The “Asset Protection” Problem. This is actually a variant of the “independent screen” problem noted in paragraph 2 above, but it’s of sufficient importance to warrant its own separate discussion. When a charitable organization is sued (witness the recent flood of lawsuits against churches for the improprieties of their clergy), it becomes critical to know which of the organization’s assets are “up for grabs” i.e., available to be seized by a winning plaintiff and which are not. Many an organization has been surprised to learn that its internal “endowment funds” were available to the reach of the enterprising plaintiff. That’s because the funds were “in-house” in other words, owned either by the charity itself or by its “separate” but nonetheless captive foundation. However, if a third-party donor contributes money to the charity’s organization fund at the SCCF, then that money is not reachable by the charity’s creditors, even though the money is held for the exclusive benefit of that charity. The sensationalist publicity surrounding recent lawsuits against charities has caused many donors to pull back on their charitable giving. By offering these donors a creditor-proof alternative, the SCCF is re-kindling donors’ interest in making gifts that they otherwise might not have made at all.
Conclusion The formation of the Smith County Community Foundation is an important guarantee for the future and long-range benefit of the Smith County area and its citizens.
*As a legal requirement, gifts to component funds of SCCF become the assets of SCCF.
**IRS regulations include but are not limited to restrictions on holding interests in business enterprises, prohibition against grants to support lobbying, and expenditure responsibility procedures for grants to organizations that are not public charities. As a “public charity,” SCCF operates under different rules and its administration monitors all compliance issues.
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