Tab 25: Sample Fund Agreements

Required Documents

• Sample Fund Agreements (required for each type offered by the foundation):
• - Agency Funds
• - Donor Advised Funds
• - Designated Funds
• - Field of Interest Funds
• - Restricted Funds
• - Scholarship Funds
• - Unrestricted Funds

Do we have to provide a sample fund agreement for every type of fund we offer?

Yes. Standard IV.C requires that a community foundation maintain a written record of the terms and conditions for each component fund, and that all such records must reference variance power. Therefore, you must provide sample fund agreements for each fund type your foundation offers. To assure reviewers that you have covered each fund type, cross-reference these agreements with your list of funds in Tab 29.

All fund agreements, except those for unrestricted and donor advised funds, should describe variance power. Variance power is by far the most flagged topic across all compliance reviews. You should carefully review the definition of variance power contained in your community foundation's fund agreements to ensure that it meets National Standards.

Once executed, can a donor make changes to a fund agreement?

Maybe. Whether or not a change can be made after an agreement has been executed depends on so many different factors that it is nearly impossible to answer in the abstract. For example, it is generally acceptable for donors to release a restriction imposed by a fund agreement. The IRS has also indicated that donors may change the name of a fund or change the successor advisors to a fund after the agreement has been executed. It is also generally acceptable to correct a typo or scrivener's error in an agreement. Other changes, however, such as adding restrictions or substituting one restriction for another, are generally not acceptable. Because a determination of whether or not it is legal to make changes to a fund requires a careful analysis of the specific facts and circumstances present in each case, you should always consult with legal counsel before making changes.

Can a fund agreement include a provision permitting a donor to amend the agreement?

No. Specific language in the fund agreement that grants the donor the broad right to make changes is inconsistent with two National Standards (III.B and IV.E). Such language is evidence of excessive donor control and inconsistent with the gift being subject to the legal and fiduciary control of the foundation's governing board. While actually making changes to a fund agreement may also be evidence of excessive donor control, depending on the circumstances, specific language in the fund agreement is the most likely place that you will see such evidence. Our conversations with community foundations suggest that there is much confusion about this issue.

What are the legal rules that govern changes to fund agreements, and why is doing so inconsistent with National Standards?

Under the community trust rules as set forth in the tax regulations, in order to be considered a component part of a community foundation, a fund may not be subject to any "material restriction" with respect to the transferred assets. Although the community trust rules only apply explicitly to community foundations in trust form, the IRS has argued that they apply by analogy to assets held by community foundations organized in corporate form, as well. Legal scholars debate the applicability of the community trust regulations to assets held directly by community foundations. National Standards were designed to go beyond the minimum rules that apply to all charities and articulate those elements that are essential for an organization to be considered a community foundation. In establishing National Standards, the Standards Action Team sought to create common rules that apply to all community foundations, regardless of legal form. Accordingly, standard IV.E, as clarified by the key elements, indicates that observing the balance between donor involvement and donor control requires that community foundation assets not be subject to material restrictions.

What are material restrictions?

A "material restriction" is any restriction or condition that prevents a community foundation from "freely and effectively employing the transferred asset" as it carries out its charitable purpose. Of course, donors impose restrictions on gifts to community foundations all the time. Clearly, not all restrictions are material restrictions. Generally, so long as a restriction is imposed at the time of the gift and does not limit the community foundation's ongoing ability to "freely and effectively" employ the transferred assets, the restriction will not pose a problem. To clarify, the regulations specifically identify a number of restrictions that are permissible and a number that are not.

Examples of restrictions that are allowed to be imposed at the time of the gift include allowing the donor to: designate a beneficiary, restrict the purpose of the fund, name the fund, restrict distributions to "income only," and require the community foundation to ratian the assets when doing so is important to a charitable purpose. The regulations also allow a donor to retain the right to offer advice with respect to distributions.

Specific examples of conditions that are material restrictions include allowing the donor to: reserve the right (either directly or indirectly) to designate the beneficiary of a fund after the gift is made, designate the timing of distributions (other than in the gift agreement), require an irrevocable relationship with a financial advisor, or require the foundation to retain an investment. Other restrictions, though not automatically "material," may still be problematic if, considering the facts and circumstances, the restriction prevents the community foundation from exercising ultimate control over the assets received.

The mere fact that a donor retains the right later to designate a beneficiary or control the timing of distributions is, by itself, enough to be considered a material restriction. This is true even if the donor never actually exercises that right. Accordingly, a fund agreement that specifically grants the donor the ability to change the fund agreement from time to time would be a material restriction. Such a broad right to amend, unless otherwise limited, would necessarily include the right to change the fund to designate beneficiaries or control the timing of distributions and would be a material restriction.

Agency endowed fund
This term can be used interchangeably with organizational endowment fund and connotes a fund established to benefit a particular agency.

Beneficiary
An individual designated to receive benefits under an agreement including, but not limited to, a will, trust, or fund.

Donor advised funds
A fund may be classified as donor advised if it has at least three characteristics: (1) a donor or person appointed or designated by the donor has, or reasonably expects to have, advisory privileges with respect to the fund's distributions or investments, (2) the fund is separately identified by reference to contributions of the donor(s), and (3) the fund is owned and controlled by a sponsoring organization, such as a community foundation. A fund possessing these characteristics may be exempt from the donor advised fund classification if it grants to one single public charity or government unit or if the fund meets certain requirements applicable to scholarship funds.

Field of interest fund
A fund held by a community foundation that is used for a specific charitable purpose such as education or health research or a specific geographic area.

Fund types
There are a variety of fund types offered by community foundations such as scholarship, donor advised funds, field of interest funds, unrestricted funds, and agency endowment funds.

Irrevocable
Unable to be retracted or reversed.

Marketing materials
The printed pieces, such as brochures, letterhead and business cards, an organization uses to market itself.

Material restrictions
Any restriction or condition that prevents a community foundation from freely and effectively employing the transferred asset as it carries out its charitable purpose. Specific examples of conditions that are material restrictions include allowing the donor to reserve the right (either directly or indirectly) to designate the beneficiary of a fund after the gift is made, designate the timing of distributions (other than in the gift agreement), require an irrevocable relationship with a financial advisor, or require the foundation to retain an investment.

Restricted fund
Assets or income that is restricted in its use, in the types of organizations that may receive grants from it or in the procedures used to make grants from such funds.

Scholarship Fund
Established to provide support for individuals who are pursuing some training or educational opportunity.

Unrestricted fund
Funds that allow the Foundation to determine where grants will do the most good. Also called discretionary funds, they offer maximum flexibility to react to changing needs in the community.

Variance power
A distinguishing characteristic of community foundations, the variance power permits the community foundation's governing body to redirect resources in component funds if it determines that the donor's restriction is unnecessary, incapable of fulfillment or inconsistent with the charitable needs of the community or area served.