Credit unions in increasing numbers are establishing separate, affiliated charitable foundations to fulfill many objectives.
There are a number of associated benefits. A charitable foundation can:
Enhance the reputation and the brand.
Expand credit union membership by including donors to the foundation within the credit union’s field of membership.
Enhance the effectiveness of the credit union’s philanthropy by attracting outside donors while creating a larger resource pool for charitable activities.
Credit union-affiliated foundations are separate corporate entities that are tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code. The NCUA has made it clear credit unions can form and make donations — in both funds and employee time — to affiliated charitable foundations. Individuals and businesses also can make donations to them and take an income tax charitable deduction with respect to their donations.
These foundations can engage in a variety of activities, as long as the activities are consistent with accepted charitable purposes under Section 501(c)(3) of the Internal Revenue Code. Such activities run the gamut from making grants to other charitable organizations that operate programs, to engaging in the direct operation of charitable programs — e.g., scholarships and financial literacy and education.
Procedurally, formation of a charitable foundation involves incorporation, submission of an application to the IRSand registration with the state. Recognition of tax-exempt status is in the form of a “determination letter” from the IRS.
An important initial decision is the appropriate structure for the foundation’s board of directors. From a tax law perspective, there is a great amount of flexibility in terms of board size, composition, and succession.
From a liability-limitation perspective, scrupulously maintaining the separate corporate status of the foundation should in itself be sufficient to prevent a creditor of either the credit union or the foundation from piercing the corporate veil to pursue the assets of the other entity. Nevertheless, the greater the presence of independent directors — directors who are not directors, officers, employees, or affiliates of the credit union — on the foundation’s board, the greater the appearance of separateness and the greater the protection afforded both entities.
The NCUA has offered some guidance concerning board structure, opining that it must be the case that less than a majority of the credit union’s directors serve on the board of the affiliated foundation. According to the NCUA, this avoids conflicts of interest by ensuring that credit union donations to the foundation can be approved by a majority of the credit union’s disinterested directors.
Another structural consideration is whether the foundation should have members. Incorporation requirements for charitable organizations vary from state to state, but, generally, charitable foundations formed as corporations are not required to have members. However, in order to be able to include foundation donors within a credit union’s field of membership, NCUA preference appears to be that the donors be members of the affiliated foundation.
This does not mean that such members must be given the right to vote with respect to the election of directors or the general affairs of the foundation, but they should be provided with some opportunity for input, such as voting on the selection of charitable organizations or programs to fund.
There are two paths available to charitable foundations in applying for IRS recognition of tax-exempt status. If (1) it is expected the foundation will receive gross revenue of $50,000 or less in each of its first three years; (2) the foundation will have less than $250,000 on hand at the time of submitting the application; and (3) the foundation will not, to a substantial degree, engage in credit counseling activities, then it can use a three-page streamlined application.
The average IRS turnaround time for issuance of a determination letter in response to submission of the streamlined application tends to be about three weeks. If the foundation will be larger and therefore not qualify for use of the streamlined application, then a lengthier, more labor-intensive application must be used. The average IRS turnaround time for issuance of a determination letter in this case is about three to four months.
As with creation of any entity, there is some administrative burden associated with forming a charitable foundation — e.g., filing annual information returns with the IRS, filing annual charitable organization registration statements with the state, filing annual corporate reports with the state, acknowledgement to donors, and maintaining a donors list.
However, in the constant search for new ways to thrive and better serve their members and their communities, many credit unions, determining that the benefits substantially outweigh the burdens, have found that an affiliated charitable foundation is a useful addition to their toolbox, especially for those credit unions that elect to seek NCUA approval for the foundation to be included in its field of membership.
David Kamer regularly guides credit unions through the process of establishing a foundation. As a member of Kaufman & Canoles’ Credit Union Team and Business Tax Group, David devotes much of his practice to advising tax exempt organizations concerning tax compliance, governance and operational matters. David can be reached at email@example.com (757) 624.3175.
Andy Keeney is a nationally recognized credit union attorney and Co-Chair of Kaufman & Canoles’ Credit Union Team. He has been committed to the representation of credit unions for over three decades. Andy is a frequent lecturer on wide variety of credit union topics and a featured contributor to many credit union publications. He can be reached at firstname.lastname@example.org (757) 624.3153.
The K&C Credit Union Team serves as general counsel to credit unions, large and small, regularly advising clients on consumer compliance issues, NCUA requirements, and the rules governing credit union service organizations. For more information about our team visit www.kaufcan.com