Legal Aspects of Fund Management Section 2 Fund Agreements - What Do They Really Say?

What are Fund Agreements? Fund agreements are legal contracts between a donor and the community foundation. Must be dated and executed to be valid. If the donor wants an executed original, then specify in the “In Witness Whereof” clause that the parties have “executed this Agreement in duplicate originals…” Exhibits/Attachments should be kept to a minimum and are only part of the FA if the specific exhibit # is referred to in the FA.

What are Fund Agreements? They can be amended: When all of the original donors are living and all agree plus the community foundation agrees to amend the fund agreement. When required by statutory changes (for example Pension Protection Act) Best practice is to advise living donors and seek their agreement. If all the donors aren’t living or don’t agree, then petition a court to make changes and involve the Indiana attorney general’s office. (more on this later)

What are Fund Agreements? If a fund agreement is amended, then include in the “This Agreement” opening paragraph that the fund agreement supersedes and replaces the fund agreement executed on [DATE].

What are Fund Agreements? It’s not unusual for the donor’s attorney to want to wordsmith the language when s/he is asked to review a FA by the donor. Most attorneys approach this like any other contract review. Problems arise because most attorneys don’t know that much of the language is required to be sure that the fund that is being created is treated as a component fund of the CF and not as a separate charitable entity. So you may need to remind the donor and attorney of all the benefits of being a component fund so they will accept the required language.

What Are Fund Agreements? Fund agreement templates developed by Baker & Daniels (now Faegre Baker Daniels) at the beginning of GIFT Updated in 2007 to reflect Pension Protection Act of 2006 and UMIFA You should be using the 2007 agreements. Phil created new fund agreement for community project/fiscal sponsorship funds Your flash drive contains three explanation documents: Advised Fund Designated Fund Field-of-Interest Fund

What Do Fund Agreements Really Say? Paragraph 1. GIFT AND FUND DESIGNATION  The fund is created when the first contribution is made. This can be during lifetime or from a distribution from a trust or estate. All contributions to the fund are irrevocable and become the assets of the Foundation upon contribution, and cannot be returned to the original donor. Can We Edit this Paragraph? No, all the language is needed for the fund to be a component fund of the CF, including the official name of the Fund.

What Do Fund Agreements Really Say? Paragraph 2. PURPOSE Funds are used "at the direction" of the Board of Trustees of a community foundation to be considered a component fund of the Foundation. The purpose of the fund can be: charitable purposes specified by the donor use by a government entity for public purposes use by a publicly-supported charitable entity (not a private foundation) Can We Edit this Paragraph? Yes, this where the donor’s intent is made clear. But be careful that the charitable purpose isn’t so narrow that it could be difficult to use the fund in the future. Careful review by the CF is needed.

What Do Fund Agreements Really Say? Paragraph 3. DISTRIBUTIONS The total value of the assets held by the fund can be granted from the fund, whether a pass-through fund or an endowed fund. The CF decides how much can be granted from the fund each year. The distribution or spending policy can be amended by the Foundation at any time. Grants can only be made from the fund for charitable purposes to charitable organizations that are either governmental entities or meet the public support test. The CF will honor conditions or restrictions in the FA unless doing so becomes unnecessary, not able to be fulfilled, inconsistent with the mission of the CF or the needs of the community the CF serves.

What Do Fund Agreements Really Say? Paragraph 3. DISTRIBUTIONS - continued The CF can refuse to make grants from the fund if the CF believes (no agreement is needed from the donor) that doing so would threaten the CF’s tax-exempt status or cause the CF to pay an excise tax, penalty, fine or other assessment provided for in the Internal Revenue Code. Can We Edit this Paragraph? No, all of these provisions are needed to be a component fund of the CF.

What Do Fund Agreements Really Say? Paragraph 4. RECOMMENDATIONS FOR DISTRIBUTION The donor or fund advisor may recommend grants from the fund to specific charitable organizations for charitable purposes. The CF doesn’t have to follow these recommendations. The Board must be sure grants are made to qualified, legitimate charitable organizations, or for legitimate charitable purposes. A surviving donor may make all recommendations regarding grants after the death of a joint donor. This paragraph also explains what happens after the death of a single donor, or after the death of both donors.

What Do Fund Agreements Really Say? Paragraph 4. RECOMMENDATIONS FOR DISTRIBUTION - continued Can We Edit this Paragraph? Only the part about what happens after the death of a single donor or the death of both donors can be edited. The names of a second generation fund advisor or advisors can be inserted here along with a statement that the fund will continue after the death of a single donor or the death of both donors only if the fund balance equals or exceeds the minimum amount then needed as provided in CF policies for the fund to continue for a second generation.

What Do Fund Agreements Really Say? Paragraph 5. ADMINISTRATIVE PROVISIONS AND Paragraph 6. CONDITIONS FOR ACCEPTANCE OF FUNDS The CF board is the final decision maker in all aspects of the fund operation and the CF Articles of Incorporation and By-laws, and the laws of the State of Indiana control the operation of the fund. The CF can change the charitable purposes of the fund under specific conditions if needed in the future. This is the variance power under the cited US Treasury regulation.  The Foundation’s understanding of the Donor’s intent when the fund was established, its policies regarding exercising its powers of modification and removal, and its policies regarding amending the fund agreement all apply to the management of the fund once established.

What Do Fund Agreements Really Say? Paragraph 5. ADMINISTRATIVE PROVISIONS AND Paragraph 6. CONDITIONS FOR ACCEPTANCE OF FUNDS – continued Can We Edit this Paragraph? No, all this language is required in order for the fund to be a component fund of the CF.

What Do Fund Agreements Really Say? Paragraph 7. CONTINUITY The Fund will continue so long as there are assets in the Fund and the charitable purposes of the Fund can continue. If the fund is terminated and no recommendations for distribution are included in this paragraph, the Board will use the remaining assets for charitable purposes as defined in the Foundation's Articles of Incorporation and By-Laws which most nearly approximate the Donor's original wishes. Can We Edit this Paragraph? Yes, language can be added to state the donor’s preference of how the remaining assets are to be used if the fund is terminated, subject to the CF’s right to determine how to use the remaining assets for purposes within the CF’s mission and which are closest to the original purpose of the fund.

What Do Fund Agreements Really Say? Paragraph 7. NOT A SEPARATE TRUST AND Paragraph 8. ACCOUNTING The funds will be part of the general assets of the Foundation. The fund agreement does not create a separate legal entity or trust. Earnings, fees, grants and other distributions will be tracked separately from the other funds held by the CF. Can We Edit these Paragraphs? No, all this language is required in order for the fund to be a component fund of the CF.

What Do Fund Agreements Really Say? Paragraph 10. INVESTMENT OF FUNDS All investment decisions will be made by the Foundation and the assets of this Fund may be invested together with assets from other Funds held by the Foundation. Can We Edit this Paragraph? All of the FA language is needed in order for the fund to be a component fund of the CF. Additional language can be added that gives the donor the right to allocate the original contribution and subsequent contributions among several investment pools if allowed under CF policy.

What Do Fund Agreements Really Say? Paragraph 11. COSTS OF THE FUND This fund will pay an administrative fee charged to funds of this type. This fund will be charged with a share of the CF’s investment costs. The fee schedule may be amended from time to time by the Foundation. Costs of accepting, transferring, selling, or managing the contributed property will also be charged to the Fund, including attorney’s fees. Can We Edit this Paragraph? All of this language is needed for the fund to be a component fund of the CF, but language could be added stating that the current fee schedule charged to funds of this type is described in the attached Exhibit B.