December 21, 2011

Philanthropy Focus: 10 Creative Ways to Use Your Private Foundation

Many don't realize the options available

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Private foundations provide charitably minded individuals and families with a way to do creative, flexible things with tax-privileged assets.

“As long as the investment you want to make from your private foundation is for a charitable purpose, you have the flexibility to invest in a nonprofit, for-profit, individual or consultancy,” according to Berit Ashla, a San Francisco-based philanthropic director of Foundation Source. “Your options range from an orphanage in India that has never heard of an IRS 501(c)(3) designation to a public radio station in San Diego that may be running a youth training and broadcasting program.”

Last week, Ashla hosted a webinar to describe 10 such options.

1: Design a Scholarship

Many are familiar with this concept, but a number of Foundation Source’s clients are willing to fund less traditional scholarships, not just one's ‘A’ students with outstanding CVs. Some clients who are self-made entrepreneurs have chosen to support students who remind them of themselves, in that they did not have many opportunities to get top grades—and scholarships—because they had to work after school, Ashla said.

Other clients have specifically designed scholarships for women returning to the workplace after taking time off as a mother who want to retrain to get into a new career. Still others have targeted immigrants to the U.S. who come with degrees, but need assistance to obtain further accreditation.

2: Make International Grants

Foundation Source’s clients increasingly are making international grants. According to Ashla, some clients are bringing next-generation members onto their boards who have had more international exposure than the founders and understand the interconnection of all the work the foundation cares about. A creative tension often results: Founders want to make donations locally in recognition of the source of their wealth, while new generation members do not want to be confined to those geographic borders. Foundation Source has educated and facilitated international grants for a number of these clients, she said.

Several ways exist–some riskier than others–to make international grants. Among the less risky are to fund U.S.-based nonprofit organizations with established international programs; or friends-of organizations, domestic charities designed to benefit international charities.

3: Conduct Direct Charitable Activities

A foundation engages in a direct charity when it runs an activity or program by itself rather than supports a nonprofit to carry it out. The possibilities here are limited only by the foundation’s imagination, Ashla said. Examples from Foundation Source clients include publishing an unpublished poet and setting up programs to provide funds to buy clothes for low-income people entering the workplace. One client bought used but essentially up-to-date college textbooks and sent them to his native India for use in local universities.

4: Prize Philanthropy

The idea of a prize is to incentivize a desired behavior; in contrast, awards tend to be ongoing events that periodically recognize an individual or organization demonstrating certain qualities. Prizes can be both large and small. Most are familiar with the Ansari X Prize for space flight. Ashla said the power and excitement of this prize lay not so much in its $10 million purse, but in the intellectual rigor, imagination and teamwork that was activated by the prize competition. She said smaller foundations and other organizations are thinking through how to present prizes to further their goals, activate people and reach beyond the "usual suspects."

5. Use Grassroots ‘Agents’

Ashla said that in order to be most effective, foundations often have to partner with people on the ground who are doing the work and know the issues they want to address with your philanthropy.

For instance, Foundation Source clients interested in juvenile detention have recruited people with experience working with at-risk juveniles, such as juvenile hall judges and school principals, and had them serve as agents for the foundations, giving them discretionary money to distribute—with foundation board approval—as they see fit to the young people. These agents understand issues on ground, and with the money have the flexibility to address them.

6. Matching and Challenging Grants

Matching and challenge grants can incentivize others to step up in times of need or accelerate an opportunity. But how foundations partner with charities they want to support is critical. Ashla said it is best to work directly with target nonprofits to understand where they are with their own fundraising and the programs for which they are raising money.

One client used deal-of-the-day online service Groupon to specifically issue a matching grant to anyone interested in buying a $15 DonorsChoose certificate, resulting in $30. DonorsChoose allows teachers to post specific projects on its website that need funding. Groupon rules required some 500 individuals to buy certificates in order to activate and release the money to DonorsChoose. In fact, Ashla said, 1,200 bought grant certificates, resulting in more than $100,000 for the charity.

7. Grant Directly to Individuals

Many foundations do not realize they can make grants directly to individuals. Ashla pointed out that the IRS names specific areas where this can happen: emergency assistance, hardship and medical emergency grants. For example, Foundation Source put together a mortgage assistance program to make grants to people on the brink of losing their homes in current foreclosure crisis. 

8. Provide Technical Assistance

Technical assistance is a way for foundations to recognize that organizations they support often put all their effort into their programs, but lack money to invest in infrastructure to grow the organization, take it to scale and make a healthier functioning business model. Ashla said that although Foundation Source’s entrepreneurial clients tend to offer technical grants more readily than traditional foundations, many others recognize that program is not enough; infrastructure is necessary for a healthy organization.

Technical assistance can take the form of helping a nonprofit with its HR or activating a network of experts that will offer pro bono assistance. Some foundations set aside money for technical assistance for which nonprofits can apply. Others structure their grants so that some of the money is for general operating expenses and some is for the nonprofit to determine what technical assistance it needs.

9. PRIs: Loans, Loan Guarantees, Equity Investments

Ashla said Foundation Source is seeing tremendous growth in “impact investing”—program-related investments and mission-related investments—as founders and board members think about how to activate more than the required 5% minimum distribution requirements of a foundation. 

Some clients make loans to organizations interested in expanding in some way. One client lent money to build a new church. Another helped a city car-share service that needed money for increased insurance coverage to grow its car fleet. This client, an entrepreneur who knew the importance of establishing credit, lent money at minimal interest over long time horizon so the organization could establish a strong record with banks. Another foundation client has devoted its entire philanthropy portfolio to MRIs.

10. Activating the ‘Other’ 95% 

Program-related investments are part of a foundation’s 5% minimum distribution requirement. By IRS standards, a foundation can make PRI investments with a very strong program component that are riskier than traditional investments. Now, Ashla said, clients want to know how to activate the other 95% of their foundation’s assets, and beyond that are looking to proactively go after mission-minded investments. 

The more people ask their financial advisors about impact investing, she said, the more it is going to grow. Opportunities where people are sharing information and even sharing portfolios are increasing. And they are learning that having their foundation’s financial and investment portfolios aligned does not have to compromise financial returns; they can pursue investments with social/environmental return and financial return that are competitive.

10.5. Beyond Grants

The power of foundations today is more than being an ATM machine. According to Ashla, it resides in:

  • Seminars, forums, convening;
  • Building grantee capacity;
  • Making introductions;
  • Boosting visibility of high-impact organizations;
  • Providing meeting space and the like.
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