How do community foundations work and what's unique about their investment policy?

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AcadiFi · Accepted Answer

A community foundation is a tax-exempt public charity that pools contributions from many donors to support a specific geographic region. Examples include the hypothetical Pinecrest Regional Foundation or real-world analogues. Donors can establish donor-advised funds (DAFs), designated funds, field-of-interest funds, scholarship funds, or agency endowments under the community foundation's umbrella.

Structure: the community foundation is a single 501(c)(3) public charity. Each donor's contribution creates a separate fund account within it, but all are part of the same corporate entity. This allows the donor to get a public-charity-level tax deduction (60% of AGI for cash, 30% for appreciated securities) rather than the lower private foundation limits. The foundation's board governs investment and grant policy, though DAF holders recommend grants.

Investment policy unique features: (1) Pooled investment — most community foundations offer two or three pooled portfolios (e.g., Long-Term Growth Pool, Balanced Pool, Short-Term Pool) and donors allocate among them based on their fund's horizon. (2) Multiple layers of liquidity needs — grant pipelines from DAFs can be volatile (donors can recommend large grants with 30-90 day notice), which is very different from a private foundation's predictable 5% payout. (3) Administrative fee model — typically 75 to 150 bps on DAF balances plus investment fees. (4) No 5% required payout — community foundations are public charities, not private foundations, so they don't face Chapter 42 excise rules; but individual DAF activity is increasingly scrutinized.

For CFA exam, know the classification: community foundation = public charity, not private foundation.

How do community foundations work and what's unique about their investment policy?

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