The Potential Role of Parallel Foundations in the Museum Community

It is becoming increasingly common for charitable organizations to establish parallel foundations. The first ones in Canada were established by hospitals to protect against the erosion of their government grants; provincial governments had determined in the early 1970’s that an amount equal to the funds raised from the private sector would be deducted from their provincial grant. The basic division of responsibility is that the hospital carries out the healthcare and the foundation carries out the fundraising. In the museum community, there is generally the same division: the museum looks after the programs and the foundation looks after the fundraising.

The concept has gained in popularity as an increasing number of charitable organizations initiate planned giving programs, based on the oft-repeated information about the trillions of dollars that will be transferred from our parents’ generation. This is not the soundest reason for establishing a parallel foundation. In fact, is there a sound reason for a museum to establish a parallel foundation?

The decision to invest the time – lots of it – and the money – lots of it – in setting up such an entity must be the result of a careful analysis of the pros and cons of the circumstances. Will the museum’s fundraising be more effective? Not likely; if it isn’t effective now, the mere existence of a foundation in and of itself won’t make the fundraising any stronger or better. Will donors be more likely to give simply because their money will go into a foundation? Not likely; donors respond to a cause they believe in and to an approach by a peer or colleague who asks for a donation.

Why then might a museum or art gallery decide to establish a parallel foundation? Perhaps the most important reason is that the Board of Directors of the foundation will be recruited with the primary objective of raising money. The composition of this board will be quite different from the board of the museum whose main interest is likely program-related. Development staff will know that fundraising in most institutions is a huge task and they need the vital assistance of knowledgeable and committed directors who will get out into the community to ask for money.

A second reason is that a parallel foundation can protect the museum’s valuable assets in the case of a lawsuit for damages. This is especially important if the parent organization engages in any activity where there is a strong element of risk. A museum with a long-standing endowment fund which will have accumulated substantial assets over many years can transfer these assets to a foundation to avoid their loss in a suit.

Another important reason for such a transfer is with a museum or gallery seeking grants from other funding agencies; there may be a reluctance to approve a grant if there is a large asset base within the operating charity. Assets in a separately incorporated foundation do not belong to the charitable organization and would therefore not likely be used as the basis for refusing an application.

The existence of a foundation may provide comfort to a donor who is contemplating a planned gift to a cause, although it is worth repeating that the foundation will not be the catalyst for the donor’s gift. However, once the donor has decided to make the gift, especially as part of his or her estate plan, the security of a well-managed fund with an appropriate investment policy may help conclude the gifting process. The fund is also protected from litigation.

Planned gifts are often made by a donor who wants to leave something in perpetuity, to immortalize him or her in an institution that mattered to them. To make a gift to a foundation, which will have an endowment component, will protect that gift for the long term. A similar gift to an operating charity may well be spent to meet an immediate financial need.

An operating charity may establish a parallel foundation because everyone else is doing it; it has become the flavour of the month. This is as much folly as it is to establish one to simply attract planned gifts. A planned giving program needs donors, especially long standing donors who have given regularly to the institution. They need to be cultivated, moved up the donor pyramid of giving in a relationship with the cause. A parallel foundation is not a case of “If you built it they will come”.

However, once the foundation is operational having been established for all the right reasons, it can be an effective part of a charity’s financial stability. The income generated from a well-managed investment fund may be one of the most significant sources of support for a charity’s operating costs (unless the funds are donor-restricted). Its board can devote all its time and talent to raising money. There must be close co-operation and open communication between the two entities to ensure that the foundation does not stray from the original goals of the charity. But the charity itself will have the peace of mind of knowing that there is a group of people totally dedicated to raising and managing its assets while it gets on with the day-to-day issues and needs of today. Tomorrow is someone else’s responsibility.

Written by: Betsy Clarke, CFRE, President of Betsy Clarke & Associates