Tab 1: Governance and Related Documents

Required Documents

• Corporate form
• - Bylaws
• - Articles of incorporation
• Trust form
• - Deed of Trust

• Written job descriptions of Board Members

• Evidence of ongoing training and development of board members

 

Other Suggested Documents

• Board resolutions
• Mission statement
• Communication materials

What is variance power?

Variance power grants your foundation's governing board the power to modify any restriction or condition on the distribution of funds for any specified charitable purpose or purposes, or to a specified charitable organization or organizations. Additionally, if your foundation has assets held in trust, your governing board must have the power to remove trustees in certain circumstances.

Will my foundation's variance power meet National Standards?

Your community foundation's ability to prove that it meets the requirements for a relevant national standard depends on whether it has provided sufficient information. In determining that, the review team will take into account your foundation's entire record book, not just rely on a single document. However, to meet the national standard for variance power, specific language is important. That is due to two factors: 1) variance power is derived from federal tax law, and 2) the manner in which your foundation discloses that power is a factor in proving that you have applied generally accepted accounting principles to agency endowments.

Your foundation must present evidence of its variance power in your governing documents and sample fund agreements. According to tax regulations, a fund will not be considered a component part of a community foundation unless, among other things, the governing body has the power to "modify any restriction or condition on the distribution of funds for any specified charitable purpose or to any specified organization if, in the sole judgment of the governing body, such restriction or condition becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served." Further, your governing body must be able to modify the restriction without obtaining the approval of any participating trustee, custodian, or agent of the community foundation.

Although the community trust rules apply explicitly to community foundations created in the trust form, they have been applied by analogy to assets held by community foundations organized in corporate form, as well. Therefore, your governing board must have variance power over a restricted fund in order for it to be considered a fund of the community foundation and not a separate private foundation. Under IRS rules, the authority to exercise the variance power may be granted in the governing documents, the board resolutions, or the fund agreement. However, because a community foundation may have little or no opportunity to negotiate the terms of the gift instrument for testamentary gifts, variance power language must appear in the governing documents to ensure that the governing board possesses the variance power for all funds.

In addition to the legal requirements of the tax regulations, the variance power also affects how funds are treated under Financial Accounting Standards Board (FASB) Statement 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others. That statement explains how to treat gifts that a donor wants to restrict to benefit a specified charity or charities (donor-designated funds). It also explains how to treat direct charitable gifts that restrict distributions from the fund may benefit only the transferring charity (agency endowments), which FASB 136 calls a "reciprocal transaction". Despite the presence of the variance power, FASB 136 requires that agency endowments be recorded as a liability of the community foundation. Donor-designated funds, however, may be recorded as assets of the community foundation if the donor is explicitly informed that the community foundation has the power to remove or change the restriction. Paragraph 12 of FASB 136 clarifies that "explicitly grants means that the recipient organization's unilateral power to redirect the use of the assets is explicitly referred to in the instrument transferring the assets..." [emphasis added]. Thus, although reference to the variance power in the governing instruments alone is sufficient for purposes of the tax regulations, the terms of FASB Statement 136 require that it also be in the gift instrument. Because most donor advised funds and all unrestricted funds are, by definition, not subject to such donor restrictions, the variance power need not be included in those fund agreements.

Although the National Standards requirements surrounding the variance power have their genesis in the legal and accounting rules, they do not end there. In creating the National Standards, the Standards Action Team sought to go beyond the minimum rules that apply to all charities. It wanted to articulate those elements that are essential in order for a foundation to be considered a community foundation. In doing so, the Standards Action Team determined that not only is the possession of the variance power essential to being a community foundation, but so is clearly communicating the existence of that power to donors. Thus, although the tax regulations and the accounting do not absolutely require the variance power in both the governing documents and fund agreements, the National Standards require it in both. Similarly, although FASB Statement 136 does not clearly apply to field of interest funds, the National Standards require the variance power to be in the fund agreements for all funds except unrestricted donor advised funds and other unrestricted funds.

Finally, these interpretations of the variance power are relevant to confirmation of compliance and do not necessarily exactly reflect interpretations relevant for legal and accounting purposes.

Do you have examples of sufficient variance power?

Sufficient Language:

The board shall have the power to modify any restriction or condition on the distribution of funds for any specified charitable purposes or to specified organizations if, in the sole judgment of the board (without the approval of any trustee, custodian, or agent), such restriction or condition becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served.

ANALYSIS: This is nearly identical to the sample language found in the tax regulations. This language may be used both in the governing instruments and in fund agreements.

Insufficient Language:

The board shall have the power, after notifying the donor and giving the donor an opportunity to object, to modify any restriction or condition on the distribution of funds for any specified charitable purposes or to specified organizations if, in the sole judgment of the board, such restriction or condition becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served.

ANALYSIS: The provision requiring donor notice and an opportunity to object suggests that the community foundation may not exercise the variance power without donor consent. The tax regulations make clear that the power to modify must be within the board of directors' sole discretion; approval may not be required from any trustee, custodian, agent, donor, or beneficiary.

---

Sufficient Language:

This agreement is subject to the foundation's authority to vary the terms of the gift as stated in section [X] of the foundation's bylaws. The foundation shall promptly notify the agency of any decision made to exercise the variance power.

ANALYSIS: This language can be used in the fund agreement provided that the referenced language in the governing documents is sufficient. The notices requirement alone does not suggest that the community foundation must obtain approval before exercising the variance power.

Insufficient Language:

The board shall have the power to modify any restriction or condition on the distribution of funds for any specified charitable purposes or to specified organizations if, in the judgment of the board of directors, such restriction of condition becomes impossible, impracticable, or illegal to carry out.

ANALYSIS: The limitation that the power to modify is only available when it becomes "impossible, impracticable, or illegal" to carry out is too narrow to qualify as the variance power. To be sufficient, the board must also have the power of modification when the restriction is "inconsistent with the charitable needs of the community."

Insufficient Language:

The fund is protected from obsolescence should the purpose for which it was created ever become obsolete or incapable of fulfillment.

ANALYSIS: The limitation that the power to modify is only available when the purpose of the fund becomes "obsolete or incapable of fulfillment" is too narrow. To be sufficient, the board must also have the power of modification when the restriction is "inconsistent with the charitable needs of the community."

---

Sufficient Language:

The board shall have the variance power as set forth in tax regulations 1.170A-9(e)(11)(V)(B), (C), and (D).

ANALYSIS: Although it is not consistent with best practices to simply cite the regulations, it is sufficient for National Standards.

Insufficient Language:

The board shall have the variance power as set forth in tax regulations.

ANALYSIS: This language neither clearly indicates that the variance power exists with respect to a particular gift nor meaningfully directs the donor to additional information about the variance power.

Insufficient Language:

The board shall have the power to modify any restrictions of conditions of the gift as set forth in the Internal Revenue Code.

ANALYSIS: The variance power is not articulated in the Internal Revenue Code.

Insufficient Language:

It is intended that the fund shall be a component fund of the foundation and not a separate entity for tax purposes and that nothing in this agreement shall affect the status of the foundation as a charitable organization as described in section 501(c)(3) of the Internal Revenue Code of 1986 (hereinafter referred to as the "Code") as amended and as an organization that is not a private foundation within the meaning of section 509(a) of the code.

ANALYSIS: The language does not include a clear reference to the variance power. Simply stating that it is intended that the fund be considered a component fund does not actually grant the community foundation the powers that are essential for a fund to be considered a component fund.

---

Sufficient Language:

This agreement is subject to the foundation's authority to exercise the variance power to vary the terms of the gift as further described in the foundation's bylaws [or other governing documents].

ANALYSIS: This suffices for language in the fund agreement provided that the referenced language in the governing documents is sufficient. Paragraph 84 of FAS 136 permits an explicit reference to the variance power with further explanation in the governing documents.

Insufficient Language:

This agreement is subject to the terms and conditions of the foundation's governing instruments, all of which are hereby incorporated by reference.

ANALYSIS: This language does not clearly refer to the variance power and does not meaningfully direct the donor to additional information about the governing body's power to modify the terms of the gift.

Insufficient Language:

The foundation shall hold, manage, invest, and reinvest the fund; shall collect the income; and shall disburse proceeds gained from the investment of principal for charitable purposes, in accordance with the provisions of this agreement and in accordance with the provisions specified in the articles of incorporation and bylaws of the foundation as amended from time to time, all of which provisions are incorporated by reference and adopted.

ANALYSIS:The language does not include a clear reference to the variance power and does not meaningfully direct the donor to additional information about variance power.

Articles of incorporation
A document filed with the Secretary of State or other appropriate state office by persons establishing a corporation. This is the first legal step in forming a nonprofit corporation.

Autonomous
Not subject to control from outside; independent.

Board committee
A group of persons elected or appointed to perform some service or function, as to investigate, report on, or act upon a particular matter.

Board member
A member of a governing board.

Bylaws
Rules governing the operation of a community foundation in corporate form, developed according to state law requirements. Bylaws often provide the methods for selecting trustees, creating committees, and conducting meetings.

Deed (declaration) of trust
The organizing document of a community foundation in trust form.

Fiduciary duties
The duties of board members and trustees arising under state law that are often described as the duties of care, loyalty and obedience. Fiduciary duties also arise in other cases where one is in a position of trust or confidence.

IRS Publication 78
IRS Publication 78, also known as Cumulative List of Organizations, is a quarterly publication that lists all organizations to which charitable contributions are tax deductible. Inclusion of an organization in Publication 78 signifies that it has received a ruling or determination letter from the IRS. To remain listed in Publication 78, an organization's status must not be suspended or revoked.

Mission statement
A mission statement is a brief statement of the purpose of an organization.

Named component funds
Funds established by donors and owned by a community foundation that may be named to reflect the donor, organization or interest area.

Net income
Excess of revenues over outlays in a given period of time (including depreciation and other non-cash expenses).

Nomination process
Process of identifying people to serve on the Board of Directors.

Nonprofit
A term describing the Internal Revenue Service's designation of an organization whose income is not used for the benefit or private gain of stockholders, directors, or any other persons with an interest in the company. This term includes a variety of charitable and non-charitable organizations such as public charities, private foundations, labor unions, trade associations and social welfare organizations.

Nonsectarian
Not affiliated with any particular religion.

Public benefit
Provides benefit for the community's social, economic and cultural well being, and health and safety.

Standing committee
A group of people appointed to consider a specific matter.

Tax-exempt
General term for an organization that does not have to pay taxes such as federal or state income tax or state sales tax. The rules for tax exemption vary depending on the type of tax and location.

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

Variance power
A distinguishing characteristic of community foundations, the variance power permits the community foundation's governing body to redirect resources in component funds if it determines that the donor's restriction is unnecessary, incapable of fulfillment or inconsistent with the charitable needs of the community or area served.