Charitable Fund With Commercial Ties Seeks Its Niche in Philanthropy

In the early 1990s, Robert and Sandra Kantor of Sun Valley, Idaho, began looking for a simple way for Robert’s parents to convert about $1-million of their assets — including some real estate — into tax-deductible dollars that would be channeled to charity.

His parents were particularly interested in setting up a trust that, upon their deaths, would maximize the tax deductions on their estate and give their heirs the ability to make grants around the country.

But Mr. Kantor, who owns a commercial real-estate company, was surprised to find that none of the available charitable options fit his parents’ needs. Community foundations, he says, were too focused on their local regions; private foundations offered too few tax benefits; and the gift funds set up in recent years by banks and investment companies — most notably Fidelity Investments — largely handled only gifts of cash and securities.

The Kantors began working with the Pitcairn Trust Company, an investment business in this Philadelphia suburb, which had been toying with the idea of creating a new vehicle to help donors give to charity. Together, they came up with the idea for the National Philanthropic Trust. The trust — a charity that accepts tax-deductible contributions — opened in fall 1996. Set up much like a community foundation with a few twists, it manages about $12.2-million in assets and has so far distributed about $600,000 to charity.

The National Philanthropic Trust is one of the latest of a new breed of charities called commercially related donor-advised funds. The funds — at at least half a dozen banks and investment companies around the country — allow donors to put their money in special accounts, take a tax deduction for their gifts, and then advise the fund on which charities they would like to support.

Since most of the charitable dollars are managed by the financial institutions that created the funds, the companies benefit from the arrangement by collecting commissions and management fees.

The companies say the funds help donors give money to charity and are a legitimate way to broaden the investment services the companies offer. But critics say profit, not philanthropy, is the driving force behind the funds, and they question whether the funds deserve their tax-exempt status.

Some charities, particularly community foundations, may also see the funds as unfair competition for donors’ dollars. Some charity officials are even asking members of Congress and Treasury officials to reconsider whether financial institutions should be allowed to run charities and under what circumstances.

For their part, officials at the National Philanthropic Trust maintain that the organization was not created simply to make more money for Pitcairn. Instead, as the trust’s slogan reads, it is intended to be in the business of “amplifying assets dedicated to philanthropy.”

They also say that their organization is different from the other commercial funds, more independent from its parent company and more interested in its own charitable mission.

In addition, they say, it offers donors choices and services not typically available at similar charities. For example, it was set up expressly to accept and manage gifts of appreciated assets such as real estate or wine. Trust officials are even talking to one prospective donor who would like to donate his collection of surfboards.

The trust is also setting up a network of consultants around the country to advise donors interested in giving to the arts or health care or other specific causes. It organizes family meetings on giving and helps donors write mission statements for their funds. It has arranged with two of the country’s biggest auction houses to help it handle gifts of art.

“We share some qualities with both community foundations and the funds like at Fidelity, but we are different from both,” says Eileen Heisman, the trust’s senior vice-president. But, she notes, because Fidelity is so huge — managing $900-billion in total assets and $1.2-billion in its gift fund — it has defined the field of commercial funds.

“People make assumptions that we are all the same model,” she says, “but we shouldn’t be clumped in together.”

One key difference that sets the trust apart from the others, Ms. Heisman says, is that in certain situations, the trust will allow donors to have the assets of their gifts managed by an investor other than Pitcairn. Money donated to Fidelity and other commercial funds is managed exclusively by the parent company.

But some officials in the charity world find such distinctions to be trivial.

“The genetic material is clear no matter what color it might try to paint itself,” says C. Dennis Riggs, president of the Louisville Community Foundation, referring to the philanthropic trust. “A financial institution is a financial institution, and it is owned and operated by, and under the aegis of, a financial institution that controls a significant amount of its resources both in operations and investments. It is using Pitcairn money for marketing and for other things. That is not an independent public charity.”

Despite the clamor over the commercial funds, the National Philanthropic Trust has operated in relative quiet.

For one thing, the charity is still small, with only 21 donors and no gifts yet of assets other than cash and securities. And while the trust has advertised in some specialty journals, set up a site on the Internet, and sent out direct-mail pieces, it has not done a blitz of marketing. Advertising materials put out by Pitcairn do not even mention the charity.

Pitcairn is a family-run investment house that opened to the general public less than a decade ago. Until 1989, it managed assets only belonging to the descendants of John Pitcairn, who in 1883 helped to found the Pittsburgh Plate Glass Company, known now as PPG Industries. It manages $1.8-billion in assets.

So far, the company has spent as much as $1-million on the National Philanthropic Trust, provided it office space in the Pitcairn building here, and is in the midst of a five-year contract to manage the charity and its money. Clark D. Pitcairn, one of John Pitcairn’s great-grandsons and a member of the investment company’s board, is president of the National Philanthropic Trust.

Like Pitcairn, which caters to well-heeled clients — taking only accounts of at least $1-million each — the philanthropic trust is geared toward big donors. It accepts only gifts worth at least $100,000. Donors who give at least $1-million may elect to place their money in non-Pitcairn accounts. So far, all of the trust’s money is managed by Pitcairn.

Clark Pitcairn and other trust officials are keenly aware of the potential conflicts of interest presented by the organization’s ties to the investment company.

“We need to be far enough removed that it doesn’t have a perception — or reality — that it is a kept organization established by Pitcairn to make money,” says C. Wolcott Henry III, chairman of the trust’s board and the head of two private foundations.

For example, says Mr. Henry, it was essential that the charity’s board not be heavy with Pitcairn officials. Three out of the four trustees who founded the charity were investment-company officials. But when the charity was officially established, one Pitcairn officer stepped down. Now, only two of the nine board members are affiliated with the company.

Adds Mr. Wolcott: “The more independent we are, the better to be accepted by community foundations and others in the charity community.”

The better, perhaps, to preserve its tax-exempt status, as well.

Some critics of commercial funds like Pitcairn’s contend that the funds do not deserve their exemption, and they are readying for a fight to change the rules that govern gift funds operated by financial institutions.

Representatives of the Council on Foundations in Washington are drafting a legislative proposal that would define exactly what a commercially related charity is. Eventually, they hope to encourage a member of Congress to introduce the proposal and press for its passage into law.

Their proposal would be designed to test whether the charity and a financial institution share common financial interest, control of the organization, or marketing efforts. If they do not pass certain tests of independence, the funds could lose their tax exemption, be classified as a private foundation, or face other consequences.

The council has discussed its legislative ideas with members of Congress and Treasury officials but have not yet received any commitments.

Ms. Heisman at the National Philanthropic Trust says that as the organization now stands, it probably would not pass the kind of independence test the council is trying to establish. But, she adds: “We are still new. Give us six months to two years, and if everything works the way we want it to work, we will fall outside the definition” of a commercial fund.

What may ultimately set the trust apart from its commercial-fund peers is a plan to actually spin off from Pitcairn.

According to its five-year contract with the investment company — which runs to June 2001 — the charity pays, on average, an administration fee equal to about 1 per cent of its assets under management. If the trust’s average annual assets turn out to be about $20-million, then it would have paid about $1-million to the company. That, says Alvin A. Clay III, Pitcairn’s president, would cover the company’s start-up and administrative costs.

Eventually, too, the charity expects to move out of Pitcairn’s offices. And, trust officials say, as the organization grows — hopefully bringing in more big donors who may have their own investment managers — a majority of the trust’s assets may no longer reside with Pitcairn.

“The intent is that after five years it will no longer be dependent on Pitcairn,” Mr. Clay says. “The best thing that could possibly happen would be that it could stand on its own two feet — have its own offices, own staff. Of course, we anticipate continuing to have a good relationship with them and earning some of their business.”

For now at least, the company may be a selling point for the charity.

The largest single gift to the trust so far — $2.5-million — came from a donor who already invested his money with the Pitcairn Trust Company. The donor, Eugene Yost of Kiawah Island, S.C., says he learned about the trust from his Pitcairn adviser. He says that he and his wife, Prudence, decided to give up the private foundation they had established about 15 years ago and instead set up a fund at the trust.

The biggest reason for the switch, he says, was that a donor-advised fund offered them better tax benefits. They chose to set up a fund at the philanthropic trust, he says, because of its connection to Pitcairn.

“We’ve had good results and good relations at Pitcairn,” Mr. Yost says. “Leaving [our gift] with friends of Pitcairn was comfortable for me.”