By Joseph C. Imberman and Donald P. Kent

Mark Zuckerberg recently announced the most dramatic commitment yet of a Silicon Valley billionaire, 99% of his Facebook shares to charity. But he chose to not use one of the charitable vehicles widely used in the current philanthropic world, let alone the Federation system. Instead he established an LLC, a common corporate entity which need not have a charitable purpose but may be used charitably. He therefore can make distributions of all types whether or not they qualify for a charitable income tax deduction. He receives no charitable deduction when setting up the LLC, only when the LLC makes qualified charitable contributions.

If it catches on, Zuckerberg’s LLC could change the way ultra-wealthy Jewish families structure their philanthropy. They, like Zuckerberg, might expand their definition of philanthropy. They might be drawn to for-profit enterprises that provide a social benefit, but are not charitable and might actually be profitable in the traditional sense. They might engage in global activities that do not qualify for an income tax deduction in the US. It could be the next great wave and the way in which the next generation of ultra wealthy Jewish philanthropic families think!

The Zuckerberg announcement comes on the heels of the most recent US Trust sponsored study on high net worth Americans. “Last year, virtually all high net worth households donated to charity, compared to 95.4% percent in 2011. This marks the highest rate of high net worth participation in charitable giving since the study began in 2000. This high rate of giving among the wealthy compares with 65 percent of the U.S. general population who donate to charity.” …

This year’s study, more than ever, tells us that when wealthy donors are intentional about and engaged in their giving … when they find that meaningful interaction between their ideas and ideals – they give more, are more impactful and more personally fulfilled,” said Claire Costello, national philanthropic practice executive for U.S. Trust (from the 2014 U.S. Trust Study of High Net Worth Philanthropy).

What percent of Jewish high net worth donors are giving to the Annual Campaign of JFNA and the federations? Is it at or near capacity? Has this presumed number shrunk or grown over the past 50 years? Countless community based demographic studies tell us the answer we do not want to hear. We are more and more dependent for the annual campaign’s receipts on fewer and fewer donors while, at the same time, direct giving to other Jewish organizations, local, national and global continues to soar.

Part 1 – The Beginnings

The philanthropic landscape has changed dramatically, especially in the Jewish community. Choices have mushroomed in a way that was unimaginable 50 years ago. For many years after JDC and The Jewish Agency joined forces to form the United Jewish Appeal (UJA) this was virtually the only way for Jews to express their desire to help build Israel and serve “Jews in need” around the world. For millennials, this is all ancient history and literally unknown to many of our children.

Today, umbrella or federated giving is less appealing in the Jewish and secular communities. Donors want to have more control over their charitable dollars. They question the efficiency of charities, and how much of their donations actually benefit the intended recipients directly and many have very definite opinions about how to spend the wealth they have made or inherited. Unfortunately, many do not understand the benefits of the Jewish Federation system beyond being a conduit to a multitude of charities domestically and abroad. Sadly many see the Federation as an inefficient bureaucracy with an inflexible distribution system.

The wealthiest Jewish families are contributing billions to private foundations, supporting organizations and donor advised funds to extend influence over their families’ charitable giving for generations. Increasingly, these families are being drawn to a wider array of worthy charitable causes. These same donors are insisting on a higher level of due diligence, thoughtful review and scrutiny for all dollars granted by their families. Entire industries have developed over 20-30 years to support this phenomenon. As we have indicated in earlier pieces, enlightened Federations have responded to this development and attracted a significant share of these families’ philanthropies under the Federation umbrella by expressing broad and deep interest in emerging philanthropic trends in both the Jewish and general worlds. And those Federations which can prove their knowledge of these trends and interact with the deepest thinkers about philanthropy are able to change the philanthropic world in their communities. Montreal’s Generations Fund campaign is a case in point … a 70 million dollar hybrid endowment project designed to support middle income family identity building efforts and supported by a comparatively small number of families deeply concerned about the issues.

A note on donor advised funds (DAF’s)

While our earliest endowment efforts go back to the turn of the last century, donor advised funds (DAFs) became a popular and desirable bridge between donors and Federations in the late 70s and 80s (and continue to today). But DAFs, alone, are not a synonym for endowments.

Both Federations and general community foundations pioneered DAFs as an alternative to private foundations and dominated the field until 1990 when Fidelity introduced the first DAF program sponsored by an investment firm (from that point forward this flexible form of philanthropy blossomed among commercial institutions). DAFs have not caused the demise of collective responsibility. They are simply a natural outgrowth of a powerful trend in philanthropy that now accounts for over $70 billion today in charitable assets.

In fact, the growth of DAFs has clearly helped Federations fulfill their mission during the past 30 years even if there have been lost opportunities or the focus has been to much on administration of the funds. Importantly, Federation sponsored DAF programs have enabled engagement in a different kind of conversation among donors, Federations, and the communities they serve. The primary goal of these programs must be to better understand each donor’s philanthropic needs and priorities and to help donors become greater and more effective philanthropists. In the process, dollars can be made available to fund communal priorities, through the annual campaign or directly with specific agencies or programs. The anecdotal evidence is clear. A donor who sets up her DAF at a Federation or Jewish Community Foundation is more likely to maintain and increase support for Federation’s priorities than a donor who sets up a DAF at Fidelity or any other financial institution.

Unfortunately along the way, many federations and community foundations became overwhelmed by the requirements of soliciting and managing these programs and neglected the most important part of their work – the building of permanent endowment assets for the community. And in turn may have missed the opportunity to use the DAF program as a way to bring the next generation into a more philanthropically active position with the local community.

Part II – Building two development systems

Old fashioned permanent endowment fund development requires entirely different conversations with an overlapping pool of prospects. We contend, as we outlined in an earlier piece, it is an entirely different type of dialogue. Focus on DAFs and Support Foundations was the key driver behind the explosive growth of “endowment” assets, from $1b to $16b in less than 20 years. But, the assets in these vehicles are not all endowment assets. Providing the resources necessary to manage the relationships with “endowment” families is vital for Federations. And in many communities investing staff and financial resources in attracting more families and dollars to partner with Federations by creating these vehicles is dollars well spent. But not if managing these programs fails to result in greater connection with these families and ultimately greater resources for the Federation’s priorities, the highest priority being the building of permanent endowment funds to support the Federation’s mission in the decades ahead.

At universities the highest form of giving, often referred to as the “ultimate gift,” is an endowment to the institution to achieve some sort of individual and collective philanthropic goal. At universities, donors who make a meaningful commitment for a permanent endowment gift might not be expected to continue their annual giving. In contrast, for Federations the annual campaign has been and still is the sine qua non. It is the modern expression of collective responsibility. Perhaps this helps to explain why there has not been a high priority consistent campaign-like approach to building Federations’ permanent endowment funds until quite recently.

In the early days of Federation endowment development, (pre-DAFs), many Federations attempted to build permanent endowments through their legacy programs, sometimes referred to as “Letter of Intent” or “Declaration of Commitment” and then Book of Life programs. In some communities, these programs resulted in a significant increase in permanent endowment assets, typically a decade or two after the programs were initiated. But it was rare that the “campaigns” which produced the commitments persisted more than a few years. They would come and go with the capacities or interest of staff or leadership until the advent of the Create a Jewish Legacy and the Life and Legacy programs. Congratulations to JFNA and the Harold Grinspoon Foundation for funding and managing these programs over a now sustained period!

Not surprisingly the most effective campaign to build permanent endowments in the Federation system has been the campaign to endow annual gifts. The women who created the Lion of Judah endowment program (LOJE) deserve tremendous credit for spearheading this effort first in Miami and now nationally. The bulk of these commitments estimated to be in excess of 1 billion will only be realized on the death of the donors. The annual grants from these endowment commitments will likely exceed $50 million, accounting for 5-7% of annual campaign revenue in the future.

A brief note about permanent endowment funds would be helpful. Permanent endowments are endowments that have been designated by donors or Boards to provide perpetual support. Typically charities “spend” ONLY 3% – 5% annually to ensure that the principal is preserved and ideally the annual grant can keep pace with inflation. This annual grant can either be for any purpose (unrestricted) or for a specific purpose (restricted). Most charities would prefer that endowments be as unrestricted as possible while most donors would prefer their endowments to be restricted in some fashion.

Federations are unique in building endowments to perpetuate annual giving. But given the role of the annual campaign in Federations, it is no surprise. Technically PACE (Perpetual Annual Campaign Endowment) and LOJE (Lion of Judah Endowment) funds are restricted endowments, but since the annual campaign funds the allocations process, it is considered by some the equivalent to a unrestricted endowment.

Chicago Federation’s Centennial campaign, raised over $750 million in permanent endowment and capital commitments and is now in its 17th year with over 5000 gifts. It is likely the single most successful activity of its kind in 50 years and provided many opportunities for donors to restrict their gifts for a wide variety of purposes. Chicago planned giving professionals believe, based on their experience, that “listening to a donor” is the single best strategy to secure a major endowment gift, often resulting in endowments to support specific themes or agencies under the Federation umbrella.

But no single broadly based program/s have risen to the remarkable success of the JFNA and Grinspoon Life and Legacy programs both of which were built on a model developed in San Diego by the Jewish Community Foundation. CJL and Life and Legacy provided the support and resources to encourage many communities to mount community wide permanent endowment campaigns as well as crucial resources to support the program locally. AND THEY ARE WORKING. They are working because the focus is not solely on the annual campaign. The goal is to undergird all of the critical Jewish institutions and develop permanent endowment assets which will ultimately be managed by the Federation or Jewish community foundation. This represents a new type of collective responsibility and is reestablishing the Federation as a central address for financial resource development in many communities. This is an important point that might get lost … so these programs are building endowments at local Jewish institutions but the funds will be held and managed by the Federations/community foundations … a win-win for the Jewish community as well as emphasizing another unique role that the Federation/JCF plays in the community.

As Federations and their leadership consider goals and strategies to continue to best serve the Jewish community at home and abroad it may be helpful to consider how best to answer the following questions.

1. Should federations realign their endowment, planned giving and donor advised fund efforts into separate activities with full support for each (as in the case of UJA Federation of New York and the Jewish Communal Fund)?
2. For communities not large enough to fully support all three functions, should their DAF programs be shifted to either larger, sister Federations or to a newly created national DAF platform operated on behalf of most or all Federations?
3. How to continue working at the construction of a fully integrated resource development structure in every community, particularly in those with separate governance for endowment assets?
4. How should professional staff be optimally aligned and trained in response to how the prior three questions are answered?
5. What can be done to more powerfully explain to donors the need for continued growth of endowment resources with public charities dedicated to address communal needs?
6. What is the next generation of electronically based social media which can be brought to bear on the development business presently reliant on long term individual relationship building?
7. What if anything should be done nationally to learn from the potentially game changing implications of the Zuckerberg/Chan gift? Will the availability of a charitable deduction be less meaningful to the more significant Federation donors? Should Federations seek to pioneer the use of for-profit entities to fulfill their mission as they did with DAFs 30+ years ago?

Donald P. Kent is an executive with Alliance Bernstein. Joseph C. Imberman is Senior Advisor, Centennial Campaign, Federation CJA, Montreal. Both are former Vice Presidents of the Jewish Federations of North America and its predecessors (UJC and CJF’s) Planned Giving and Endowments department.

The authors wish to express their thanks for suggestions and edits made by Alan Gross, Edward J. Beckwith, Steven Woolf and David Saginaw.