Setting Up A Philanthropic Endowment


Here is a glossary of terms regarding planning giving, charitable contributions and foundations.

501(c)(3)
Section of the Internal Revenue Code that designates organizations as charitable and tax-exempt. Organizations qualifying under this section include religious, educational, charitable, amateur athletic, scientific, and literary groups; and organizations involved in the prevention of cruelty to children or animals. The Endowment Program is tax-exempt under Section 501(c)(3) and is also classified as a public charity under Section 509(a)(1).

509(a)(1), (2), (3), and (4)
Sections of the Internal Revenue Code that define public charities (as opposed to private foundations). A 501(c)(3) organization must have a 509(a)(1), (2), (3), or (4) designation to define it as a public charity. The Endowment Program is a publicly supported organization under 509(a)(1)

Form 990/Form 990-PF
IRS forms filed annually by public charities and private foundations, respectively. (The letters PF stand for "private foundation.") The IRS uses these forms to assess compliance with the Internal Revenue Code. Both forms list organization assets, receipts, expenditures, and compensation of officers. Both include a list of grants made during the year, and they are available to the public.

Form 8283
The IRS form for noncash charitable contributions, filed by the taxpayer for any tax year in which you claimed a total deduction of more than $500 for all contributed property, including publicly traded securities.

Account Advisor
An individual who is authorized to recommend grants from a donor-advised fund. Vanguard Charitable Endowment Program account advisors may also recommend changes in an account's investment pool allocation and succession plan.

Adjusted Gross Income
The level of income on which you pay federal income tax, before any deductions and personal exemptions. This amount is used as a starting point for computing limitations on certain deductions.

Bequest
A sum of money or property available to the designated recipient upon the donor's death.

Charitable Remainder Trust
A trust that pays current income to one or more non-charitable income beneficiaries, and later pays the entire remainder to charity. You transfer assets irrevocably, receive a current (partial) charitable deduction for the fair market value of the remainder interest passing to charity, and the income beneficiaries earn taxable income from the trust assets. Upon termination of the non-charitable interests (usually at or upon the death of the donor), the remaining trust assets go to charity. The Endowment Program qualifies as a potential recipient charity. Special IRS rules apply to these trusts.

Charity or Charitable Organization
An organization that operates exclusively for the benefit of the community by supporting causes such as religion, education, assistance to the government, promotion of health, relief of poverty or distress, or other charitable purposes. Generally exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code, and eligible to receive tax-deductible charitable gifts.

Community Foundation
A tax-exempt, nonprofit, publicly supported institution whose funds are established by many separate donors for the long-term benefit of residents of a defined area, such as a community or state. Community foundations provide many services to donors who wish to establish endowed funds without incurring the administrative and legal costs of starting independent private foundations.

Corporate Foundation
A private, company-sponsored foundation that derives grant-making funds primarily from the contributions of a for-profit business. The company-sponsored foundation often maintains close ties with the donor company, but it is a separate, legally recognized organization, sometimes with its own endowment. A corporate foundation is subject to the same rules and regulations as other private foundations.

Corporate Giving Program
A grant-making program established and administered within a profit-making company. Gifts or grants from the corporation go directly to charitable organizations. Expenses are planned as part of the company's annual budgeting process, and the program is usually funded with pretax income.

Cost Basis
Generally the original cost of an asset, including transaction fees paid at the purchase and any reinvested dividends or capital gain distributions. For tax purposes, the cost basis is subtracted from the sales proceeds to determine any capital gain or loss. Special IRS rules apply for gifts and bequests.

Council on Foundations
A membership organization that works to support foundations by promoting knowledge, growth and action in philanthropy.

Donor-Advised Fund
Any separately accounted for fund maintained by a sponsoring charity where (a) the donor or a designee of the donor is given the opportunity to advise the charity regarding investments, grant recipients, and the amount and timing of grants; and (b) the sponsoring charity retains exclusive legal control over all decisions regarding investments, grant recipients, and the amount and timing of grants.

Endowment
The principal amount of a gift or bequest accepted by an organization or foundation. The principal is intended to be maintained intact and invested to create a source of income for an organization or foundation. As a donor, you may require that the principal remain intact forever, for a defined period of time, or until sufficient assets have accumulated to achieve a designated purpose.

Fair Market Value
The price at which property would change hands between a willing buyer and a willing seller. Special IRS rules apply to the valuation of charitable gifts. For more information on this topic, visit the IRS website at www.irs.gov and read the following publications: Publication 526 - Charitable Contributions and Publication 561 - Determining the Value of Donated Property.

Family Foundation
A private foundation that derives its funds from members of a single family. At least one family member generally serves as an officer or board member of the foundation. As the donor, you or your relatives play a significant role in governing or managing the foundation throughout its life. Most family foundations concentrate giving within local communities.

General Fund
A fund established by the Endowment Program from which grants can be made to support charitable causes across the country. The Program uses its own discretion to make these grants.

Giving Pattern
An overall picture of the types of projects and programs that a donor has supported over time. This may include areas of interest, geographic locations, dollar amount of funding, or kinds of organizations supported.

Grant
An award to an organization that is made to support its charitable activities.

Incremental Gift Plan
The Endowment Program's Incremental Gift Plan allows new donors to reach the Program's $25,000 minimum by contributing multiple gifts of at least $5,000 each within two consecutive years.

In-Kind Contribution
A donation of goods or services rather than cash to a charitable organization.

Investment Pool
An investment vehicle made up of a combination of mutual funds. The Endowment Program has six investment pools - Total Equity Pool, Growth Pool, Moderate Growth Pool, Total Bond Pool, Gift Preservation Pool and Social Legacy Pool-each made up of a combination of Vanguard funds. As an account advisor, you recommend pool investment allocation based on your philanthropic objectives and time frames for recommending grants.

Irrevocable Contribution
Contributions to the Endowment Program are irrevocable, meaning that the gift and all related future earnings are no longer your assets. Your gift becomes the property of the Program, and you cannot impose any restrictions or conditions that prevent the Program from furthering its charitable mission. This is necessary to ensure your full tax deduction at the time your gift is made.

Marginal Tax Rate
The income tax rate at which the last dollar of your income is taxed. Under federal law, you often pay a lower tax rate on your first dollar of taxable income than you do on your last dollar. The marginal rate is the highest rate at which your income is taxed.

Net Proceeds
The amount received from the sale of assets or securities after deducting all costs incurred in the transaction.

Pooled-Income Fund
A fund that commingles your contributions with assets from other donors and operates similarly to a charitable remainder trust. You transfer assets irrevocably, you receive a current charitable deduction for the fair market value of the remainder interest passing to charity, and the income beneficiaries earn taxable income from the fund's assets. Upon termination of the non-charitable interests (usually at or upon the death of the donor), the remaining assets go to charity. The Endowment Program qualifies as a potential recipient charity. Special IRS rules apply to these funds.

Private Foundation
A nongovernmental, nonprofit organization, usually funded by a single source (such as an individual, family, or corporation), with a program managed by its own trustees or directors. A private foundation is established to maintain or aid social, educational, religious, or other charitable activities, primarily through grant-making. Private foundations are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. However, private foundations are subject to a 1% or 2% federal excise tax on their net investment income.

Public Charity
A nonprofit organization that is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and that receives its financial support from the public. Religious, most educational, and many medical institutions are public charities. Other organizations exempt under Section 501(c)(3) must pass a public support test to be considered public charities, or they must be formed to benefit an organization that is a public charity.

Public Support Test
A test designed to ensure that charitable organizations are attracting contributions from the public rather than a limited number of donors. The specific test that applies to a donor-advised fund is the Section 509(a)(1) and 170(b)(1)(A)(vi) test. Organizations must show each year that they receive at least one-third of their support from the public, including government agencies and foundations. An organization that fails this test still may qualify as a public charity if (a) its public support equals at least 10% of all support and (b) it also has other characteristics-such as a broad-based board-that make it sufficiently "public." (This is a more subjective test.)
Charities report public support information to the IRS each year on Form 990.

Restricted Funds
Funds having stipulations on their use, such as the types of organizations that may receive grants from them, or the procedures used to make grants from such funds.

Select Pool
An Endowment Program investment pool that is identical to one of the existing six investment pools, except that the administrative fee is reduced and charged manually each quarter. There are six Select Pools, and they are only available for accounts with balances exceeding $5 million.

Successor-Advisor
A person named to continue a donor-advised fund's activity after the death of the last surviving account advisor. This could be a relative, friend, or representative of the account advisor. A successor-advisor must provide the Endowment Program with written proof of the advisor's death before assuming the role of account advisor. Upon doing so, this individual can then name new successor-advisors.

Tax-Exempt Organizations
Nonprofit organizations that do not have to pay state or federal income taxes. Any organization (other than churches) seeking recognition of its status as tax-exempt must apply to the IRS and generally to the state Attorney General's office. Charities may also be exempt from sales and local property taxes.

Trust
A legal agreement that allows the donor to set aside money or property of one person for the benefit of one or more persons or organizations. The legal title of a trust remains with the trustee.

Trustee
The person(s) or institution(s) responsible for the administration of a trust.

Unit Value
A calculation based on the pool's aggregate value, after Endowment Program expenses, divided by the number of units outstanding. The unit value includes any unrealized gain or loss in the underlying mutual fund investments, and any dividend and capital gains distributions paid by the funds. The unit value is calculated for each pool at the end of each day the New York Stock Exchange is open.

Unrestricted Funds
Funds that are not specifically targeted to particular uses by the donor, or for which restrictions have expired or been removed.