Philanthropy 101: What Is a Community Foundation?

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Posted: February 20, 2020
Category: SDSCF Blog

You may have wondered why we have “Community Foundation” in our name. Most people are familiar with charitable foundations they’ve seen in the media – many with recognizable names from the prominent individuals or families who established them. But the community foundation model is less well-known. Essentially, a community foundation is a tax-exempt organization that receives contributions from multiple donors and provides grants and charitable support within a community, focusing primarily on a particular geographical region.

Unlike other nonprofits, community foundations are primarily grantmaking organizations, not direct service providers. Grants may be awarded to any qualified 501(c)(3) charitable organization for all kinds of purposes. For example, a community foundation might grant money to an existing nonprofit to support current operations, build capacity, purchase capital equipment or furnishings, or establish a new charitable program. Sometimes community foundations will grant money to benefit a specified segment of the community – for instance, giving scholarships to a university to help underserved students.

A unique feature of a community foundation is the ability to house many component funds under a single nonprofit umbrella. Each fund has a separate identity, often in the name of a specific donor, agency, or purpose, yet the cash assets of each fund can be pooled for investment purposes, enabling the foundation to achieve superior diversification and long-term total returns.

Why Give to a Community Foundation?

Donors often prefer to donate to a community foundation for a number of reasons, such as:

  1. Community foundations are permitted by law to give donors “advisory rights” on grantmaking from a separate fund established by the donor. While the community foundation retains the legal right to accept or deny the grant recommendation, the donor’s wishes are almost always approved. The reason is that a community foundation supports a wide array of 501(c)(3) nonprofit organizations. As long as the nonprofit is in good standing with the IRS and there is adequate cash in the fund that the donor established, there is rarely a reason why the donor’s grant request cannot be accepted.
  2. Donors may make substantial contributions to a fund they establish and then recommend grants from the fund over a short or long period of time. This facilitates large or complex transactions where the donor needs to move quickly, often to ensure that their gift is tax-deductible. For example, if a donor has a substantial amount of appreciated stock they want to donate, and the donor wants to do that in December so that the gift is eligible for a tax deduction, the donor can give the entire amount of appreciated stock to a community foundation, receive a donor gift letter, and then make grant recommendations to other charities over time. A similar timing situation can arise if a donor wants to contribute appreciated real estate, or is selling a business and needs a timely tax deduction.
  3. In some cases, a donor may want to set up a permanent endowment fund. When a community foundation receives a gift for an endowment, the foundation invests the proceeds in a well-diversified balanced pool of investments designed to grow the endowment over time. A portion of the investment earnings from the endowment is then used for grantmaking. In this manner, the original corpus (principal) gift is preserved and grows in perpetuity while generating funds for new grants year after year. In contrast, a non-endowment fund may be spent down to $0.

Types of Funds

A community foundation will typically have several types of funds, which may be either “endowment” or “non-endowment” funds. Here are a few examples of the funds we offer at the San Diego Seniors Community Foundation:

  • Donor-Advised Funds – As described above, the donor maintains an advisory role on grantmaking from this type of fund and can choose to grant money to any number of charitable programs, projects, or organizations.
  • Agency Funds – This type of fund exclusively benefits one or more specific named agencies (e.g., Meals on Wheels or ElderHelp). Agency funds can be established by the agencies themselves or by outside donors, and are often used to establish permanent endowments that are safeguarded in perpetuity by the community foundation.
  • Field of Interest Funds – A community foundation or donor may establish a fund that provides grants for a stated charitable purpose. In our case, SDSCF has a Senior Orphans Fund and a Senior Center Fund, among others. Grants may be awarded to multiple 501(c)(3) organizations that are doing charitable work within those specific fields of interest.
  • Scholarship Funds – A donor may establish a scholarship fund to benefit a stated charitable group (often defined by economic hardship). The donor may form an advisory committee of friends or colleagues to determine appropriate scholarship recipients or may delegate that responsibility to community foundation staff. For example, a donor might open a scholarship fund to help seniors of limited means acquire job training or go back to college so they can earn income in retirement.
  • Discretionary Funds – In some cases a donor leaving a gift from their estate may prefer to specify that the board of a community foundation has discretion in giving grants to the most pressing needs or effective charitable interventions in their community.

Community Leadership

Community foundations have the unique privilege of serving as unbiased advocates and leaders within a region’s nonprofit community. While many nonprofit service providers are focused primarily on their specific area of charitable work, community foundations are interested in raising the level of philanthropic giving, advocacy, and capacity for an entire region.

Thus, when a donor gives to a community foundation, they are indirectly benefitting the entire charitable community. Additionally, because of this base of broad charitable interest and involvement, a community foundation’s leadership often has unique insights about specific nonprofit organizations and perspective on where grants may be most effectively deployed.

If you are interested in learning more about how community foundations work, or potentially opening a fund with the San Diego Seniors Community Foundation, please don’t hesitate to reach out. We are working to ensure older adults in San Diego have access to the resources they need to thrive, and we’d be grateful for your support.

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