January 3, 2013
We put this question and several others to Frederick Schoenbrodt, a member of CFNJ’s Board of Trustees, an attorney, and an expert in wills, trusts, and estates.
Schoenbrodt says that, “while the amount contributed, $500 million of Facebook stock, is certainly large enough to justify the costs of establishing and operating a private foundation, Mr. Zuckerberg may have been drawn to certain tax and operational advantages that a community foundation offers relative to a private foundation.”
Whatever his reasons, Mr. Zuckerberg’s gift is the latest high-profile example of a broader trend towards the use of community foundations and, in many cases, donor-advised funds at community foundations as a flexible, efficient and highly effective tool for accomplishing a donor’s long-term charitable goals.”
Here’s the rest of our interview:
CFNJ: What are the specific advantages that have pushed this trend [of giving to community foundations] forward?
FS: Two advantages come to mind. First, and I believe to a lesser extent, are the income tax advantages.
By making this gift to a public charity, Mr. Zuckerberg may enjoy a better tax result than if he had made the same gift to a private foundation. In general, a donor’s income tax deduction for a contribution to charity is subject to certain limitations based upon the donor’s adjusted gross income (so-called “AGI limitations”). These AGI limitations vary depending on the nature of the recipient, i.e., public charity (more favorable) or private foundation (less favorable), and whether the donation is of cash (more favorable) or property (less favorable). In the case of a gift of publicly traded stock to a public charity, like a community foundation, the donor’s deduction is limited to 30% of the donor’s adjusted gross income. If the same gift was made to a private foundation, the donor’s deduction would be capped at 20% of adjusted gross income. In either case, the amount of any contribution in excess of the applicable limitation could be carried-forward as a deduction for up to five subsequent years.
In most cases, the AGI limitations have little practical effect. For example, if a donor makes a $25,000 gift of cash or publicly traded stock to charity in a year in which her adjusted gross income is $250,000, she will be able to deduct the full amount of the contribution whether the contribution is made to a public charity or a private foundation. On the other hand, in the case of a very large gift relative to the donor’s income, the donor is likely to enjoy greater tax advantages by making the gift to a public charity.
Of course, we do not know whether these potential tax advantages had any impact on Mr. Zuckerberg’s decision to make this gift to a public charity, instead of a private foundation. Any donor contemplating a large charitable gift might decide that maximizing tax savings is the deciding factor, a non-factor, or one of many factors in determining “how” to make the gift. Nevertheless, Mr. Zuckerberg’s gift is a reminder that in certain cases a gift to a public charity like a community foundation may offer greater tax advantages than the same gift to a private foundation.
CFNJ: And the other main advantage?
FS: Second, and I believe of far greater significance, is the operational simplicity of community foundations relative to private foundations.
For many donors to community foundations, of equal or greater importance to any tax advantages is the relative simplicity of a gift to a community foundation compared to the costs and complexities of establishing and operating a private foundation. For a donor focused on the substance of the endeavor and impatient with bureaucracy, as Mr. Zuckerberg appears to be, a gift to a community foundation may be particularly appealing.
If a donor is happy to let the community foundation apply the gift in the manner it sees fit, he may make an unrestricted gift to the foundation. On the other hand, if he wishes to guide the purposes to which his charitable contributions are applied (like a donor to a private foundation), he may establish a donor-advised fund at the community foundation. In such a case, the donor retains responsibility for the “fun part” of philanthropy, i.e., recommending grants to organizations and purposes that further the donor’s philanthropic vision, while remaining completely free from the burdens and rules imposed upon private foundations by the IRS and various state laws regulating charities.
Another wonderful feature of a community foundation is that it serves as the eyes and ears of a donor out in the community. The staff of a community foundation is the essential connection between the donor who possesses a philanthropic and charitable vision and those in the community who can assist him or her in implementing that vision. The leadership and professional staff of a community foundation can also be a sounding board for entrepreneurial and visionary charitable ideas, and a means of connecting like-minded philanthropist of all means.
A well-established community foundation, like the Silicon Valley Community Foundation or the Community Foundation of New Jersey, has developed that structure over many years. The culture and experience at a newly formed private foundation must be built from the ground up. That takes time. For the donor anxious to see his or her charitable vision begin come to life, a community foundation may be the perfect philanthropic partner.
CFNJ: Are there disadvantages to a community foundation vis-à-vis a private foundation?
FS: From the donor’s standpoint, the primary drawback of making a gift to a community foundation instead of a private foundation is the loss of formal control over the recipient organization’s charitable programs. In a private foundation, the donor and the donor’s family may control the foundation’s operations, both in the short term and for generations to come. In contrast, the donor’s role in grantmaking from his donor-advised fund at a community foundation is technically advisory, rather than controlling, although in many community foundations the donor’s family may succeed the initial donor as successor advisors.
CFNJ: What impact could this gift have on community foundations at large?
FS: Any time a high profile donor like Mr. Zuckerberg makes a substantial gift to a community foundation, it’s a good thing because it shines a spotlight on the vital, and growing, role that community foundations play in responding to current challenges and mapping out an even brighter future. Here in New Jersey, we have an exceptional community foundation in CFNJ and now is a great time to remind everyone of the exciting, boundless potential that arises every time a donor partners with a community foundation to advance that donor’s specific charitable vision or to help that donor define a more general charitable intent.
CFNJ: Is there any downside to the gift?
FS: The only downside to Mr. Zuckerberg’s gift that I see is if regular people, like you and me, get the mistaken impression that partnering with a community foundation to begin a personal or family legacy of grantmaking charity is an area reserved only for billionaire CEOs and the similarly ultra-rich. In fact, the strength of community foundations like CFNJ is in their unique ability to be useful to the many, rather than the few.
CFNJ: Some have said that the donation could end up being disastrous for the Silicon Valley Community Foundation since Facebook stock hasn’t exactly held its value well since the company’s IPO in May. What do you make of that?
FS: If any received shares drop in value after receipt, the foundation will simply have fewer assets on hand for its own charitable operations, an unfortunate result to be sure, but not one that should threaten the foundation’s solvency or be “disastrous” in any way that I can fathom.
The statement likely reflects a confusion of two ideas – a donor’s contribution of a very large, concentrated holding in a single publicly traded stock (something that almost any charity would welcome) and the long-term over-concentration of a charity’s own investment portfolio in a single publicly traded stock or other investment (something that almost any charity should avoid as too risky). Here, it seems likely that the community foundation’s investment committee will look to diversify the contributed shares, both in the short term and over time, and that diversification should be fairly easy to accomplish, as there is a robust public marketplace for Facebook stock.
Frankly, it is very difficult to imagine a situation where a contribution of this type and magnitude could ever be disastrous to a community foundation. To the contrary, such a contribution is far more likely to empower the foundation’s charitable efforts – its very reason for being – and permit it to implement its existing charitable programs more vigorously and, infused with new resources, find new ways to do good things in the community it serves and the world at large.
CFNJ would like to thank our trustee, Frederick Schoenbrodt, for taking the time to answer these important questions. To learn more about working with a community foundation, contact CFNJ at 973-267-5533.