Charitable
Funds With Commercial Ties
Seeks Its Niche in Philanthropy
By Debra E. Blum
This article appeared in The Chronicle of
Philanthropy (April 23, 1998). This reprint is by permission of the publication.
In the early 1990s, Robert and Sandra Kantor of Sun Valley,
Idaho, began looking for a simple way for Robert's parents to convert about $1-million of
their assets -- including some real estate -- into tax-deductible dollars that would be
channeled to charity.
His parents were particularly interested in setting up a
trust that, upon their deaths, would maximize the tax deductions on their estate and give
their heirs the ability to make grants around the country.
But Mr. Kantor, who owns a commercial real-estate company,
was surprised to find that none of the available charitable options fit his parents'
needs. Community foundations, he says, were too focused on their local regions; private
foundations offered too few tax benefits; and the gift funds set up in recent years by
banks and investment companies -- most notably Fidelity Investments -- largely handled
only gifts of cash and securities.
The Kantors began working with the Pitcairn Trust Company,
an investment business in this Philadelphia suburb, which had been toying with the idea of
creating a new vehicle to help donors give to charity. Together, they came up with the
idea for the National Philanthropic Trust. The trust -- a charity that accepts
tax-deductible contributions -- opened in fall 1996. Set up much like a community
foundation with a few twists, it manages about $12.2-million in assets and has so far
distributed about $600,000 to charity.
The National Philanthropic Trust is one of the latest of a
new breed of charities called commercially related donor-advised funds. The funds -- at at
least half a dozen banks and investment companies around the country -- allow donors to
put their money in special accounts, take a tax deduction for their gifts, and then advise
the fund on which charities they would like to support.
Since most of the charitable dollars are managed by the
financial institutions that created the funds, the companies benefit from the arrangement
by collecting commissions and management fees.
The companies say the funds help donors give money to
charity and are a legitimate way to broaden the investment services the companies offer.
But critics say profit, not philanthropy, is the driving force behind the funds, and they
question whether the funds deserve their tax-exempt status.
Some charities, particularly community foundations, may
also see the funds as unfair competition for donors' dollars. Some charity officials are
even asking members of Congress and Treasury officials to reconsider whether financial
institutions should be allowed to run charities and under what circumstances.
For their part, officials at the National Philanthropic
Trust maintain that the organization was not created simply to make more money for
Pitcairn. Instead, as the trust's slogan reads, it is intended to be in the business of
"amplifying assets dedicated to philanthropy."
They also say that their organization is different from the
other commercial funds, more independent from its parent company and more interested in
its own charitable mission.
In addition, they say, it offers donors choices and
services not typically available at similar charities. For example, it was set up
expressly to accept and manage gifts of appreciated assets such as real estate or wine.
Trust officials are even talking to one prospective donor who would like to donate his
collection of surfboards.
The trust is also setting up a network of consultants around the country to advise
donors interested in giving to the arts or health care or other specific causes. It
organizes family meetings on giving and helps donors write mission statements for their
funds. It has arranged with two of the country's biggest auction houses to help it handle
gifts of art.
"We share some qualities with both community foundations and the funds like at
Fidelity, but we are different from both," says Eileen Heisman, the trust's senior
vice-president. But, she notes, because Fidelity is so huge -- managing $900-billion in
total assets and $1.2-billion in its gift fund -- it has defined the field of commercial
funds.
"People make assumptions that we are all the same model," she says, "but
we shouldn't be clumped in together."
One key difference that sets the trust apart from the others, Ms. Heisman says, is that
in certain situations, the trust will allow donors to have the assets of their gifts
managed by an investor other than Pitcairn. Money donated to Fidelity and other commercial
funds is managed exclusively by the parent company.
But some officials in the charity world find such distinctions to be trivial.
"The genetic material is clear no matter what color it might try to paint
itself," says C. Dennis Riggs, president of the Louisville Community Foundation,
referring to the philanthropic trust. "A financial institution is a financial
institution, and it is owned and operated by, and under the aegis of, a financial
institution that controls a significant amount of its resources both in operations and
investments. It is using Pitcairn money for marketing and for other things. That is not an
independent public charity."
Despite the clamor over the commercial funds, the National Philanthropic Trust has
operated in relative quiet.
For one thing, the charity is still small, with only 21 donors and no gifts yet of
assets other than cash and securities. And while the trust has advertised in some
specialty journals, set up a site on the Internet, and sent out direct-mail pieces, it has
not done a blitz of marketing. Advertising materials put out by Pitcairn do not even
mention the charity.
Pitcairn is a family-run investment house that opened to the general public less than a
decade ago. Until 1989, it managed assets only belonging to the descendants of John
Pitcairn, who in 1883 helped to found the Pittsburgh Plate Glass Company, known now as PPG
Industries. It manages $1.8-billion in assets.
So far, the company has spent as much as $1-million on the National Philanthropic
Trust, provided it office space in the Pitcairn building here, and is in the midst of a
five-year contract to manage the charity and its money. Clark D. Pitcairn, one of John
Pitcairn's great-grandsons and a member of the investment company's board, is president of
the National Philanthropic Trust.
Like Pitcairn, which caters to well-heeled clients -- taking only accounts of at least
$1-million each -- the philanthropic trust is geared toward big donors. It accepts only
gifts worth at least $100,000. Donors who give at least $1-million may elect to place
their money in non-Pitcairn accounts. So far, all of the trust's money is managed by
Pitcairn.
Clark Pitcairn and other trust officials are keenly aware of the potential conflicts of
interest presented by the organization's ties to the investment company.
"We need to be far enough removed that it doesn't have a perception -- or reality
-- that it is a kept organization established by Pitcairn to make money," says C.
Wolcott Henry III, chairman of the trust's board and the head of two private foundations.
For example, says Mr. Henry, it was essential that the charity's board not be heavy
with Pitcairn officials. Three out of the four trustees who founded the charity were
investment-company officials. But when the charity was officially established, one
Pitcairn officer stepped down. Now, only two of the nine board members are affiliated with
the company.
Adds Mr. Wolcott: "The more independent we are, the better to be accepted by
community foundations and others in the charity community."
The better, perhaps, to preserve its tax-exempt status, as well.
Some critics of commercial funds like Pitcairn's contend that the funds do not deserve
their exemption, and they are readying for a fight to change the rules that govern gift
funds operated by financial institutions.
Representatives of the Council on Foundations in Washington are drafting a legislative
proposal that would define exactly what a commercially related charity is. Eventually,
they hope to encourage a member of Congress to introduce the proposal and press for its
passage into law.
Their proposal would be designed to test whether the charity and a financial
institution share common financial interest, control of the organization, or marketing
efforts. If they do not pass certain tests of independence, the funds could lose their tax
exemption, be classified as a private foundation, or face other consequences.
The council has discussed its legislative ideas with members of Congress and Treasury
officials but have not yet received any commitments.
Ms. Heisman at the National Philanthropic Trust says that as the organization now
stands, it probably would not pass the kind of independence test the council is trying to
establish. But, she adds: "We are still new. Give us six months to two years, and if
everything works the way we want it to work, we will fall outside the definition" of
a commercial fund.
What may ultimately set the trust apart from its commercial-fund peers is a plan to
actually spin off from Pitcairn.
According to its five-year contract with the investment company -- which runs to June
2001 -- the charity pays, on average, an administration fee equal to about 1 per cent of
its assets under management. If the trust's average annual assets turn out to be about
$20-million, then it would have paid about $1-million to the company. That, says Alvin A.
Clay III, Pitcairn's president, would cover the company's start-up and administrative
costs.
Eventually, too, the charity expects to move out of Pitcairn's offices. And, trust
officials say, as the organization grows -- hopefully bringing in more big donors who may
have their own investment managers -- a majority of the trust's assets may no longer
reside with Pitcairn.
"The intent is that after five years it will no longer be dependent on
Pitcairn," Mr. Clay says. "The best thing that could possibly happen would be
that it could stand on its own two feet -- have its own offices, own staff. Of course, we
anticipate continuing to have a good relationship with them and earning some of their
business."
For now at least, the company may be a selling point for the charity.
The largest single gift to the trust so far -- $2.5-million -- came from a donor who
already invested his money with the Pitcairn Trust Company. The donor, Eugene Yost of
Kiawah Island, S.C., says he learned about the trust from his Pitcairn adviser. He says
that he and his wife, Prudence, decided to give up the private foundation they had
established about 15 years ago and instead set up a fund at the trust.
The biggest reason for the switch, he says, was that a donor-advised fund offered them
better tax benefits. They chose to set up a fund at the philanthropic trust, he says,
because of its connection to Pitcairn.
"We've had good results and good relations at Pitcairn," Mr. Yost says.
"Leaving [our gift] with friends of Pitcairn was comfortable for me."
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Copyright © 1998 The Chronicle of Philanthropy
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