1. Greater Houston Community Foundation CHARITABLE TRENDS AFFECTING HIGH NET WORTH DONORS LEGISLATIVE, CULTURAL AND PLANNING Steve Maislin President & CEO Greater Houston Community Foundation February 2008

2. Greater Houston Community Foundation GHCF Background Texas nonprofit corporation that began operations in 1995 Engaged, experienced local board Our mission is Growing Effective Philanthropy in Greater Houston Partner with families, businesses and NPOs to develop innovative philanthropic strategies Operate at the nexus of donors’ passions and community needs $270 million in assets Over $58 million in grants in 2007

3. Greater Houston Community Foundation Community Foundation compared with Commercial Funds  GHCF has a local focus  Generally work with larger donors requiring some level of customized services  Accept a wide range of hard-to-value assets  Broad range of services  Foundation administration, corporate services, co- investment with NPOS (“PIPA”), scholarship funds  Staff available to address key issues  Legacy  Effective giving Selecting an NPO Defining and measuring success of a grant  Convene around local issues  DonorHouston

4. Greater Houston Community Foundation  Definition  Owned and controlled by a sponsoring organization  Fund tracked with reference to a donor or related persons  Donor, appointee or related party has (or reasonably expects to have) advisory powers with respect to distributions or investments  Exceptions  Funds that make distributions to a single organization  Funds for travel, study or similar purposes  Other funds exempted by Treasury Legislative Trends: Donor Advised Funds & the PPA

5. Greater Houston Community Foundation  Prohibited grants  Grants to individuals  Grants to any entity if the payment is not for a charitable purpose  Grants requiring exercise of expenditure responsibility  Grants to private foundations  Grants to Type III SOs (not functionally integrated, or any SO if donor or advisors controls supported organization)  Grants to non-charities for a charitable purpose Legislative Trends: Donor Advised Funds & the PPA

6. Greater Houston Community Foundation  International grants must be subject to equivalence determination or expenditure responsibility  Location of grantee is a key issue here  DAF can still be a cost-effective vehicle for such grants Legislative Trends: Donor Advised Funds & the PPA

7. Greater Houston Community Foundation  Prohibited Benefits (section 4967)  Applies when donor, advisor or related party receives a benefit from an organization that received a grant or other payment from the donor or advisor’s DAF E.g., grant to a private school that was then applied to payment of tuition for a child of the donor  Penalties 125% of the amount of the benefit  Repayment effectively goes to the government here 10% on fund managers (if they knew)  Treatment of bifurcated gifts unclear Legislative Trends: Donor Advised Funds & the PPA

8. Greater Houston Community Foundation  Excess Benefit Transactions (section 4958)  Automatic excess benefits from DAF Grant, loan, compensation or similar item (including expense reimbursement) Donor, donor advisor, family or controlled entities Entire amount if prohibited  Penalties Amount must be repaid 25% for donor, advisor, related persons 10% on fund managers  4958 trumps when 4967 could apply as well Legislative Trends: Donor Advised Funds & the PPA

9. Greater Houston Community Foundation  Excess Business Holdings Rule  Same rule as applies to private foundation  Aggregate holdings of donor, donor advisors, and related parties  DAF cannot hold more than 20% voting or profit interest 35% exception if effective control elsewhere 2% de minimis exception  Five years to divest excess holdings  Complex grandfathering rules Legislative Trends: Donor Advised Funds & the PPA

10. Greater Houston Community Foundation  Scholarships and Awards  Donor may not retain advisory power  Donor may participate buy may not control selection  Foundation board must appoint all committee members  Foundation board must approve procedure for selecting recipients on objective and nondiscriminatory basis  Disaster relief funds  OK if properly structured Legislative Trends: Donor Advised Funds & the PPA

11. Greater Houston Community Foundation  Treasury Department Study  Are charitable deductions appropriate for gifts to DAFs? Retention of contributed assets Use of assets to benefit donor or a related person  Should DAFs be subject to payout requirements? Aggregate or account level?  Is retention of advisory rights consistent with treatment of transfers as completed gifts?  Timing: one year Legislative Trends: Donor Advised Funds & the PPA

12. Greater Houston Community Foundation  Practical implications  Use SOs to hold donations of excess business holdings  Restructure multi-use funds E.g, split out DAF and scholarship fund  Reduced control over scholarship process  No expense reimbursement from DAF E.g., fundraising expenses  Gift receipt must say funds are under the exclusive legal control of the CF Legislative Trends: Donor Advised Funds & the PPA

13. Greater Houston Community Foundation  Internal Revenue Service  Continuing scrutiny of Nonprofit sector  “A well-governed NPO is a compliant NPO.” New 990  Performed a “compliance check” on all donor advised fund sponsors in the U.S.  Plan is to initiate audits of 100 Community Foundations in 2008  Legislation  Appears to be little interest in additional action at this time  Results of PPA-mandated study may determine next steps  Community Foundation field has developed “National Standards” designation Legislative Trends: IRS and Legislative Activity

14. Greater Houston Community Foundation  Supporting Organizations  Greatly increased scrutiny of Type III SOs Functionally integrated? If not, DAF and PF must exercise expenditure responsibility (and not a qualifying distribution for PF)  SOs that fundraise are seeking 501(c)(3) status  Many private foundations are not making grants to SOs  Field is seeking means to identify status of SOs E.g., Guidestar Charity Check  Similar excess benefit transaction rules Legislative Trends: Pension Protection Act

15. Greater Houston Community Foundation  Philanthropy as a status symbol  The Buffett approach - use someone else’s expertise  Tremendous growth in intermediary firms that provide fee-based services to develop and manage grants programs for wealthy donors  Family legacy  Motivation is to pass down values  Get children involved and working together  Children often do not want to work together Cultural Trends

16. Greater Houston Community Foundation  Spending down vs. endowment funding  Present value analysis  Accountability  Charitable “investments”  Using technology to link donors to NPOs and even specific programs  Grant management  Support issues or causes, not organizations  Donors invest time and expertise as well as dollars  Social venture philanthropy Cultural Trends

17. Greater Houston Community Foundation  Donors encouraging mergers, not incubation of new NPOs  Funding collaboratives  Family governance managed independent of giving platform  Example: family board using donor advised fund to execute gift transactions  Use of multiple tools within one family  Example: private foundation combined with donor advised fund  International giving Cultural Trends

18. Greater Houston Community Foundation Scenario: Creative endowment building  Background  Long-term GHCF donors  Supported four organizations, each addressing a different area of interest  Two organizations are small and not well-equipped to manage substantial endowment dollars  Donor is concerned about future focus and management of each organization

19. Greater Houston Community Foundation Scenario: Creative endowment building  Goals  Maintain support as long as organizations are well-run Preserve flexibility to replace NPO if not well-managed and focused on target issue or population  Ensure good stewardship of the funds  Solution  Establish donor advised fund, pour residuary of estate into fund  Pay fixed percentage of fund value annually to each NPO  Appoint friend as fund advisor with power to change beneficiaries within each area of interest

20. Greater Houston Community Foundation Scenario: Extending a legacy of giving  Background  Family has large, third generation private foundation  Foundation has restricted focus for giving  Spouses cannot serve on family foundation board

21. Greater Houston Community Foundation Scenario: Extending a legacy of giving  Goals  Senior generation wants to encourage philanthropy among future generations  Involve spouses in philanthropy  Create training opportunity for family members before joining foundation board

22. Greater Houston Community Foundation Scenario: Extending a legacy of giving  Solution  Create family donor advised fund  Future generations and their spouses serve on fund board  Fund creates own giving plan  Foundation can make contributions into fund  Family members have separate funds as well, with matching gifts program funded by senior generation

23. Greater Houston Community Foundation Scenario: Converting business asset to a community legacy  Background  Family has successful operating business and wants to perpetuate the business and its culture  Family wants to donate value of business to charity and gift out income from business into the community  Family wants to be involved in overseeing the business and the grantmaking

24. Greater Houston Community Foundation Scenario: Converting business asset to a community legacy  Goals  Receive current fair market value for donation of business to charity  Create mechanism to involve future generations in family philanthropy  Enable community to benefit from future business success

25. Greater Houston Community Foundation Scenario: Converting business asset to a community legacy  Solution  Establish Type I supporting organization Excess business holding rules do not apply  Family members serve on SO board  Recapitalize business into voting and nonvoting shares (S corporation)  Donate nonvoting shares into SO Note: UBIT will apply  Most of net income from business flows into SO and out into the community over time

26. Greater Houston Community Foundation Scenario: Collaborative fundraising success  Background  Prominent individual wants to help raise money for three NPOs  Unified fundraising campaign Overlapping donors Minimize cost Bigger story will raise more money

27. Greater Houston Community Foundation Scenario: Collaborative fundraising success  Goals  Benefit all three institutions equally  Make giving easy for donors with optimal tax benefits  Allow pledges, gifts of hard to value assets  Minimize fundraising expenses  Solution  Establish designated fund at GHCF  All donations made to this fund  All expenses paid out of the fund  Balance in fund distributed to three institutions quarterly  Result: over $50 million raised because institutions will be willing to partner to meet goals of supporter

28. Greater Houston Community Foundation Scenario: preserve donor intent, provide income to surviving spouse  Background  Second marriage  Husband possesses substantial assets  Couple has fund with GHCF

29. Greater Houston Community Foundation Scenario: Collaborative fundraising success  Goals  Provide income to surviving spouse  Provide some cash flow to surviving spouse to make donations  Ensure corpus goes to charitable interests of predeceased spouse  Solution  Establish field of interest fund during lifetime See how process works relative to goals  At first death, fund bequest into charitable remainder unitrust 80% of income interest paid to surviving spouse 20% of income interest paid into donor advised fund with surviving spouse as fund advisor  At second death, CRT pours over into field of interest fund

30. Greater Houston Community Foundation Questions?