Legal Aspects of Fund Management Section 5 Policies You Should Have in Place

Doesn’t Mean You SHOULD First of All… Just Because You CAN Doesn’t Mean You SHOULD

Articles, Bylaws and policies The existence, management and operation of funds held by CFs are governed by the laws of the State of Indiana, and the CF’s Articles of Incorporation and By-Laws. Include a statement in the By-Laws that all policies duly adopted by the Board of Directors from time to time, including amendments to the policies, are part of the By-Laws and incorporated therein by reference.

Policy Creation The consideration and adoption of policies are responsibilities of the governing board of the CF. While the staff can suggest areas that need to be addressed in new policies and changes to existing policies, the board should not simply adopt boilerplate language presented by the staff. Use the consideration of new policies and amendment to existing policies as an opportunity to educate the board on the underlying issues and options for addressing those issues. Policies can and should change as the CF matures and the needs and desires of the “customers” change.

Authorization to Execute Fund Agreements The Gift Acceptance policy should include: A statement that authorizes the CEO of the CF to execute fund agreements that are in compliance with CF policies. A statement that requires board approval of fund agreements that are not in compliance with CF policies prior to execution of the FA by the CEO.

Inactive funds Should cover all fund types; may want to include “This fund is subject to the Foundation’s policy on Inactive Funds, which may change from time to time.” in the Administrative Provisions paragraph. Should define what “inactive” means. Usually a stated period of time with no disbursements from the fund. Should include an exceptions policy to allow for the accumulation of funds for a large distribution from the fund in the future. Documentation can include a written request from the fund advisor or the agency benefiting from the fund that explains the long-term distribution goal and the expected timeline to reach the goal.

Inactive Funds Should include a process to terminate inactive funds when no communication with the fund advisor or fund representative over a # of years; with a response requested by a stated date and evidence of delivery of a letter by certified US mail. Should include what happens with the fund assets when the fund is terminated; added to a community endowment fund? a non-permanent discretionary fund? an appropriate FOI fund?

Small Funds Should cover all fund types but the definition of a “small” fund can be different for different fund types. Should state if and what types of funds can be created with less than the usual fund minimum so long as the fund balance equals the fund minimum that existed when the fund was created by not later than a specific date. Should require that FAs include the date on which the fund balance must equal or exceed a stated dollar amount to continue as a separate fund.

Small Funds Should include a process to terminate small funds, including those with silent FAs regarding required minimum fund balance. Should include what happens with the fund assets when the fund is terminated; added to a community endowment fund? a non-permanent discretionary fund? a appropriate FOI fund?

Confused or Hybrid Purpose Statements Should cover all fund types. Should detail the process for reviewing and resolving existing confused or hybrid purpose funds in compliance with the CFs process for exercising the variance power. Should provide that effective on a stated date and thereafter: Designated funds may not be created to benefit more than one publicly-supported charitable organization. FOI funds may not include an advisory function. Funds that make scholarship awards cannot be DAFs, agency, designated, FOI, or discretionary funds.

Managing Memorial Funds Should allow for the creation of named funds memorializing the life of one or more deceased individuals. Should state that the minimum amount needed to create the desired type of fund must be met in order to create the named fund. Should require that contributions received in memory of one or more deceased individuals will be held in a temporary fund for a minimum period of time before the permanent fund is created and the FA executed.

Managing Memorial Funds Should prohibit accepting contributions designed to create funds that will provide a personal benefit to family members of the deceased individual, i.e. a college fund for the deceased person’s children, payment of the funeral and burial expenses, payment of medical expenses, providing living expenses to the family. These are personal gifts, not charitable contributions.

Donor Initiated Fundraising Should state under what conditions that CF will allow donor-initiated fundraising, if at all. Should include an advance approval process, including period of time for CF to consider the request and what information must be included in the request. Should include what types of fundraising activities are prohibited. Should include who has the authority to enter into contracts.

Donor Initiated Fundraising Should include need for and payment of insurance coverage and whether waivers are needed from event participants. Should include an advance approval process for use of the CF’s name/logo and approval of digital and printed promotional materials. Should state what types of contributions will be accepted (cash, checks, credit cards) and how gift acknowledgements in compliance with IRS quid-pro-quo rules will be issued. Should include a statement about how expenses will be handled, i.e., no reimbursement of expenses to individuals, only direct payment from the fund to pre-approved vendors.

Non-Permanent Funds Participating in the Endowment Pool Should state that allowing non-permanent funds to be invested in the endowment pool does not change non-permanent funds to endowed funds (spending policy, fee schedule, etc.). May want to allow this with some fund types, but not all, or with different minimum fund balances and fee schedule. Do not allow community project or fiscal sponsorship funds to be invested in the endowment pool.

Non-Permanent Funds Participating in the Endowment Pool Generally not a good idea for non-permanent agency funds due to changes in agency leadership and expectations. Better to encourage creation of two funds, endowment fund and a non-permanent fund invested in the short-term pool if the ability to request distribution of 100% of fund balance is important. Require a minimum time period between creating the fund and making the first grant to avoid having to liquidate in a down market. Include an acknowledgement in the FA by the donor that they understand the risks of having the fund invested in the endowment pool and the limitations on timing of grants.

Donor Advice on Investments Outside Manager May want to consider allowing a donor to request that the CF hire the donor’s investment professional to manage the assets held in a specific fund if the original contribution is $________ or more. $250,000 minimum contribution is common. The contributed assets are no longer held in the donor’s name, but in the name of the CF and are the irrevocable assets of the CF. The CF hires the investment professional to manage the assets in compliance with the CF’s investment policy and reviews the performance of all managers investing the CF’s assets.

Donor Advice on Investments Outside Manager There is no guarantee that the donor’s investment professional will be retained in the future. The donor does not give investment directions regarding the fund to the investment professional after the contribution is made to the CF. Separate Investment Pools Some CFs allow the donor to allocate the original contribution among several investment pools depending on the fund type. Most do not allow for reallocation after the initial allocation.

Fund Policies and Practices for the Long Game DAF Successor Advisors Can DAFs continue for more than the lifetime of the founding donor(s)? Is a higher minimum fund balance at the time of the death or resignation of the founding donor required to continue for a second generation? a third generation? Policy should include whether the advisory function can continue for second/third generations and state the minimum fund balance needed at the death of the founding donor(s) and that the minimums can be amended from time to time. Policy should state what happens if the then applicable fund balance is not met, i.e., the fund is terminated and the fund assets are transferred to the community endowment fund? some other fund?

Transfer of Fund to Another Foundation The board of directors of a CF cannot be forced to transfer the assets held in a fund to another foundation, but can choose to do so if the fund agreement allows distribution of the “principal” and the transferring CF exercises its due diligence in determining that the proposed recipient foundation is a publicly-supported 501(c)(3) charitable organization that accepts and manages funds of the type being transferred. The recipient foundation should acknowledge in writing that is accepting the transferred fund and will operate and manage it in accordance with the terms of the original fund agreement.

Transfer of Fund to Another Foundation Legal counsel should always be consulted when a request is made to transfer the assets of a fund to another foundation or when a donor wants to transfer the assets of a designated fund to the charity benefited from the fund or an agency wants all of the assets of an endowed or non-permanent fund transferred to it.

Corporate Funds Corporate funds can include named DAFs, designated funds, named FOI funds, scholarship funds and named community funds. Corporate scholarship funds that are designed to benefit only current or former employees and/or their children are subject to special rules. CF policy should state which type of corporate funds will be accepted and managed. Corporate funds are usually non-permanent funds, but can be endowed funds.

Corporate Funds Fund agreements should identify the staff position that is the official representative of the corporation or business in all dealings with the CF regarding the fund and the fund agreement should be executed by the incumbent in that position. The fund agreement should specify whether the corporation or business wants its name shared with recipients of grants from the fund. Public funds held by governmental entities should never be held in CF funds. Private contributions to support the work of governmental entities can be held by CF funds but consult with legal counsel about possible government oversight of such funds.