July 30, 1998 | Read Time: 5 minutes
A popular grant-making charity established by Fidelity Investments has reacted to concerns about potentially abusive practices by refining its guidelines.
Earlier this month, Fidelity’s Charitable Gift Fund informed donors that it would no longer approve gifts to private foundations or to foreign organizations. In addition, the charity said it would give away, on average, at least 5 per cent of its assets every year, and would not allow the accounts of any of its donors to remain inactive for more than seven years.
The Internal Revenue Service has endorsed the changes, Charitable Gift Fund officials say, and has also confirmed the public-charity status of the controversial organization, which has received $1.6-billion in contributions since it was created in 1991.
The changes follow several discussions with I.R.S. officials and reflect the gift fund’s commitment to continually improve its policies in accordance with “best practices” in the field, says the fund’s chairman, Ham Rudman. The guidelines are intended to insure that charities, not the donors themselves, are the gifts’ beneficiaries.
But some leaders of community foundations, who compete for donations with Fidelity and similar philanthropies set up by commercial institutions, say that the new regulations do little to correct what they consider to be the core problem: Commerce, not charity, is the principal motivation driving such funds, critics say.
The financial institutions earn fees for managing the investments and administering the funds. Donors to Fidelity’s gift fund, for example, must invest their gifts in any of four Fidelity mutual funds.
What’s more, some community-foundation leaders say that the charities set up by financial-services companies grant donors too much control over their funds — to a degree that donors to community foundations are denied.
“While we applaud the changes, this doesn’t level the field for us,” says Diana R. Sieger, executive director of the Grand Rapids Foundation, in Michigan.
Community foundations solicit gifts, usually within a specific geographic area, to build a permanent endowment to benefit their communities. Donors may recommend causes they wish to support with the earnings from their gifts, but the foundation board makes the final determination.
The Fidelity Charitable Gift Fund, by contrast, is more like a charitable checking account. A donor may take an immediate charitable deduction for his irrevocable gift to the fund, which usually is in the form of stock. The donor retains the right to advise the fund about the size and timing of gifts made to other charities anywhere in the country.
Donors to public charities — which include the Charitable Gift Fund and community foundations — usually are permitted only to advise how their gift is spent, not to direct where their money goes, as they could do if they had established a private foundation. On the other hand, the donors are not bound by the obligations of private foundations: having to pay tax on their assets, distributing a minimum portion of their assets each year, and possibly having to value gifts of appreciated property at cost rather than at fair market value for tax purposes.
Philanthropies like Fidelity’s lack the broad-based public support and oversight that community funds possess, some critics say. “Gift funds allow greater donor control than we’re able to provide,” says Ms. Sieger, who chairs the community-foundation committee of the Council on Foundations.
The council, for its part, is still advising community foundations to operate according to standards set out 27 years ago regarding community trusts that received the assets of private foundations.
Even though the I.R.S. may have approved gift funds established by Fidelity, Vanguard Group, and other financial companies, the revenue service has erected few signposts for community foundations that wish to compete for donors while staying within the law.
“I’d still love to have more guidance” from the I.R.S., says John Edie, general counsel of the Council on Foundations.
Even without such guidance, Fidelity’s Charitable Gift Fund has proved to be wildly successful with donors: Since its inception in 1991 it has distributed about $650-million to more than 50,000 charities.
And Fidelity wins praise in some quarters for having streamlined the giving process and interested many new donors in philanthropy.
“These guys are an island of tax simplification and tax compliance in a world that’s become so complex,” says Fred Goldberg, a former Internal Revenue Commissioner whom Fidelity retained to discuss changes with the I.R.S.
Mr. Goldberg says the new policies are a reflection of prudence rather than of past abuses. The gift fund, he notes, has always given away far more than the 5-per-cent minimum to which it has committed itself, for example. And of some $650-million in gifts to date, gifts abroad have totaled only about $4-million, of which about half has gone to Canadian universities.
The ban on gifts to private foundations applies only to new accounts; other donors can continue to make such gifts until 2002. But the gift fund’s board will scrutinize all such requests closely, Mr. Goldberg says, to make sure they are not attempts to circumvent the restrictions on giving directly to private foundations.
“These are not trivial changes,” Mr. Goldberg says. “They have significantly changed the boundaries” within which the fund can operate.
For all the anxiety they have generated, commercial gift funds appear to be here to stay, say some foundation officials. And traditional community foundations must focus on honing their message in the face of increased competition.
“It behooves community foundations, rather than try and eliminate the tax exemptions of these funds, to articulate their own advantages in what has become a very competitive field,” says Stephen Mittenthal, president of the Arizona Community Foundation. “There’s no question they are drawing in donors — but whether they are fairly or unfairly, right or wrong, violating the spirit of the Tax Code or not, is almost moot.”
He adds: “Community foundations are better off marketing their services to their own constituency than issuing loud lamentations.”
