LEGAL ASPECTS OF FUND MANAGEMENT SECTION 3 FUND

LEGAL ASPECTS OF FUND MANAGEMENT SECTION 3 FUND AGREEMENTS – THINGS TO THINK ABOUT

ALL FUNDS • Do not specify the current fee structure in the fund agreement. Attaching the current fee schedule to the fund agreement as an exhibit or attachment is acceptable so long as it clearly states the date that the fee schedule is effective and that the fee schedule may be amended from time to time by the CF. • Some CFs include a statement that a “list of current fees is available upon request” and that the CF reserves the right to change its fee policies at any time.

ALL FUNDS • Do not specify the current spending policy rate on endowed funds. • What is the minimum amount needed to create a fund? • Can the fund be started with less than the minimum with the fund balance required to reach a stated minimum amount by a date stated in the fund agreement?

ADVISED FUNDS Endowed Advised Funds Consider language in the fund agreement that provides: • For build-up funds, if the fund value on the date stated in the fund agreement does not equal or exceed a stated $ amount, then the endowed advised fund will be terminated and the fund balance will be used to create a pass-through advised fund with the same original and successor fund advisors. • Is there a minimum fund value necessary for an endowed advised fund to continue for a second generation? For a third generation?

ADVISED FUNDS Endowed and Pass-Through Advised Funds • Consider language in the fund agreement that addresses who serves as Fund Advisor if someone is acting on behalf of a named Fund Advisor under a Power of Attorney or a Guardianship. • What would the donor want to happen if the CF receives a copy of a Power of Attorney or Guardianship order from someone so appointed? • Your flash drive includes possible language to include in the fund agreement in paragraph 4 - Recommendations for Distributions - with 4 options for the donor to choose from when the FA is drafted and executed.

AGENCY FUNDS Only for Charitable Organizations; not other 501(c) Organizations • Technically Advised Funds because the CF must be free to reject any recommendations from the Agency regarding distributions from the fund. • Perhaps the biggest challenge is about who owns an Agency Fund when the agency has transferred some of its own assets to the fund. • Consider including additional language to paragraph 1 – Gift and Fund Designation – to make it clear that the contributed funds cannot be returned to the agency. Perhaps: All gifts … shall be irrevocable once accepted by the CF and the fund assets cannot be returned to the donor, including the charitable organization benefiting from this fund.

AGENCY FUNDS Address common misunderstandings about these funds in an explanation document, including: • Money transferred to an agency fund now belongs to the CF even though the value of the agency fund at the CF is included as an asset on the agency’s financial statements. • Creating a fund at a CF is not like hiring an investment advisor and future agency boards of directors cannot decide that they want “their” money back.

AGENCY FUNDS • The CF can require the agency to provide current financial statements and budgets showing financial oversight and stability before distributions are made from the agency fund. • Policy questions: o o Will /does the CF offer non-permanent agency funds? Can non-permanent agency funds participate in the endowment pool? If yes, is there a notice period required before funds can be distributed? Is there a maximum $ amount that can be distributed at one time? Is there a higher fee schedule than for endowed agency funds?

DESIGNATED FUNDS Consider a policy that designated funds can be created for the benefit of only one qualified public charitable organization. Ask the donor…. • What they would prefer if the named organization ceases to exist, changes its name or merges with another organization, or dramatically changes its charitable purpose? Would they… • Want the fund to continue to benefit the organization so long as there is no dramatic change in its charitable purpose, even if the legal name of the organization changes or the original organization merges with one or more other organizations in the future?

DESIGNATED FUNDS Would they… • Want to name a successor charitable organization in the fund agreement to benefit from the fund if the original organization ceases to exist, or if the charitable purpose of the original organization or any successor organization is dramatically different from the charitable purpose of the original organization? • Want the fund to be terminated and the fund assets to be used to create a field of interest fund? • Want the community foundation to use its variance power to find a similar organization which matches the donor’s original intent?

FIELD OF INTEREST FUNDS FOI funds are really discretionary funds that give the CF’s board of directors grant making flexibility within the constraints of the description of the charitable field; can be non-permanent or endowed fund. • Be cautious about how narrowly the charitable field of interest is described. If a very narrow charitable purpose is desired: o consider naming a secondary charitable purpose, or o specify what happens to the fund if it becomes impossible for the CF to identify potential charitable organizations that could receive distributions from the fund.

FIELD OF INTEREST FUNDS • Does the donor want to include geographic limitations in terms of the service area of the charities whose charitable purpose falls within the described field of interest? • If the donor wants to have an advisory role, use a DAF agreement not a FOI. If the donor wants to limit the type of charitable organizations or causes that can benefit from fund distributions, include those limitations in the DAF agreement. This may be to control what successor fund advisors or second generation fund advisors can benefit.

DISCRETIONARY/UNRESTRICTED FUNDS • Consider providing that after the passage of a certain number of years or on a date specified in the agreement, the named endowed discretionary fund will be terminated and the fund balance will be added to the CF’s general endowed discretionary fund.

SCHOLARSHIP FUNDS Discretionary and Advised Funds: • The pool of potential recipients must be large enough to be considered a “charitable class. ” Advised Funds: • All members of the committee must be appointed by the CF and not by the Donor; the Donor and his/her designees may not control or constitute a majority of the committee