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| Best Practices: Philanthropy |
Controlling Interest
Melissa Phipps
09/01/2005
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Distressed Largesse
The strategy was born out of donor frustration,
according to Paul Schervish, director of Boston College’s Center on Wealth and
Philanthropy and codeveloper of the DMI Account concept. “Mismanagement is one
of the biggest issues you hear from regular donors—in terms of investment
returns, use of funds and the effectiveness of a project and how it is run,”
Schervish says. With the top 1 percent of philanthropists contributing 20
percent of all lifetime donations, Schervish contends that charities should
leverage the entrepreneurial and investment instincts of these donors by
allowing them to take part in the progress and management of their gifts. “The
DMI Account meets these greater donor needs while directly bypassing some of the
flaws in other, similar vehicles,” he says. “You have two strong partners
entering into a binding agreement: a donor with insights about wealth management
and long-term success, and a charity that has needs and is able to protect its
interest.”
TOP VIEW
Donor Managed Investment Accounts, or DMI Accounts, represent a new tool for
nonprofits to attract more financially savvy donors. DMI Accounts enable donors
to actively manage gifted assets for up to 10 years after they have been given
to a charity. Donors must adhere to a set of investment and performance
guidelines set by the nonprofit, at the risk of having their investment
privileges revoked. |
For the Hafleighs, a DMI Account provided the opportunity to stay
directly connected to the school after their donation was made. “I think a lot
of people would like to get more involved with philanthropy, but just writing a
check and handing off the money feels sort of empty,” Susan Hafleigh says. “I
didn’t want to be divorced from the process.” With her background managing
portfolios for Oracle, she researched gifting options before bringing the DMI
Account concept to Woodside Priory. Last spring, the Hafleighs’ account was
funded with $150,000—a relatively modest amount, she admits, for a funding
vehicle designed for gifts upward of $250,000. “It provides a template for this
school and others, and may help to make other donors more comfortable with the
concept,” Hafleigh says. “I think a lot of generous donors would be
interested.”
The DMI Account model was formalized late last year by
Winklevoss Consultants of Greenwich, Conn. The firm created a market for the
vehicle by soliciting and receiving the blessing of the IRS. Through a
private-letter ruling, the IRS confirmed that gifts made through a DMI Account
would be deductible for federal income and gift tax purposes. Winklevoss
designed the program according to the terms outlined in the ruling, although
theoretically any charity can spell out this type of relationship with a
donor.
The charity extends an investment management privilege to the donor
that can be revoked at any time and for any reason. Although there are no known
cases of a charity revoking a donor’s privileges in the short history of DMI
Accounts, the option remains the charities’ strongest safeguard against donor
mismanagement.
Winklevoss suggests carefully spelling out terms of conditions
prior to the donation and closely monitoring the relationship. The donor and
charity enter into an agreement that sets up investment guidelines to reflect
the charity’s particular risk profile and establishes benchmarks. The charity
can withdraw the investment privilege if funds in the account fall below the
average return of the S&P 500, for example, or if the account principal
erodes below a certain point. Such agreements can also determine when funds will
be used. If the donor and charity agree, the principal can be left to accumulate
for the maximum 10-year term. Woodside Priory uses a portion of the Hafleighs’
donation each year to fund a scholarship. “One client has structured it like an
endowment, where 5 percent each year is spun off to help meet the charity’s
operating expenses,” says Mark Rakov, senior managing director at
Winklevoss.
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