What Is a Community Trust Fund?

A community trust fund is a not-for-profit entity created for the purpose of improving and enriching a particular community or municipality. It receives money from donors who wish to support the efforts of the fund. A board of trustees is responsible for evaluation and approval of potential uses of funds.

A community trust fund can be structured as a traditional trust fund where the assets are managed by a bank. It also can be structured as a non-profit corporation and hire an investment manager who will oversee the investment of the funds. The goal of either structure is to maximize the earnings of the fund in order to provide a long-term stream of money for its charitable projects. Upon establishment of the fund, trust documents spell out how many board members there will be, how they will be elected or appointed and how long they will serve.

Wealthy donors might choose to contribute to a community trust fund because they have an attachment to the community. A person who has spent a lifetime in a certain area and watched it grow and develop might wish to aid the future growth and health of the area. The community trust fund can assist a donor to set up an endowment so that a portion of the donor's estate goes to the fund but is also directed to projects that are of particular interest to that donor.

A community trust fund will often issue grants to those seeking funds for specific projects. The fund will establish a procedure for persons or organizations to follow in order to request grants. The required information might include the mission or purpose of the project, the requested amount of money and the expected time period to complete or organize the project. The fund's trustees will assess the potential benefit to be derived from the project and decide whether to approve the grant.

Projects sponsored by a community trust fund can include a wide variety of goals. The focus can be on topics such as families and children, education, health, the environment or culture. Projects might include things such as scholarships for disadvantaged students or the purchase of equipment for schools or sports programs. Programs might offer educational opportunities for displaced workers or those on welfare, for example, or they might provide training and activity programs for youths to keep them in school and out of the criminal justice system. Community projects can do things such as promoting recycling or other environmental programs, helping to expand parks and gardens or sponsoring the conservation of historic buildings.

A local government might partner with a community trust fund to accomplish specific goals. When government budgets do not extend far enough to support special programs, the community trust fund can help fill the gap. This cooperation of public and private interests can benefit all of the citizens of a community.

Before modern times, community trusts were simply called "community funds." As the name implies, these funds contained money intended to help a particular city, town or village. As they did before, today's community trust funds can consist of permanent endowments plus any smaller separate trusts funded by other sources. Today, these funds usually reside with community foundations. The first known community foundation was established in Cleveland in 1914.

Most community trust funds are set up through community foundations. These are public charities that serve specific geographic areas. Most of these organizations have simple, straightforward names — for instance, the Middletown Community Foundation serving Middletown, Ohio. Depending on a community's social, political and geographic characteristics, its foundation may assist an entire county instead of just one city. You may even find city, county and even neighborhood foundations serving the same particular area.

Each community foundation is required by the IRS to have a diverse board of directors that reflects the region's demographics and interests. Foundations also need to comply with federal, state and local laws, such as having master trust agreements that govern all their funds. Like for-profit businesses, foundations must meet financial reporting requirements and demonstrate that their trusts' funds are being allocated and used for their intended purposes. These organizations should also have professional staff and volunteers to aid in both short-term operations and long-term planning.

If there's no community foundation in your area, it's possible to create one. Establishing a foundation starts with forming a legal entity, usually by incorporating and registering a name as required by state law. The next step is applying for and obtaining 501(c)(3) non-profit status with the Internal Revenue Service. Your foundation also needs a mission statement plus an organizational structure, membership guidelines and bylaws. From there, you'll need to do outreach and fundraising as well as plan future fundraising efforts.

Community foundations typically establish their own endowments. These are permanent trust funds with their principals invested to encourage long-term growth. When an endowment is created, it will have guiding documents stipulating how its funds must be used. Some endowments are managed in-house by the foundation itself, but others are handled by outside investment firms. While an endowment's principal remains invested, some of the interest earned is used every year for the fund's stated purpose. The rest can be reinvested and allowed to grow over time along with the principal amount.

As previously mentioned, community trusts can also accept money directly from donors. People can contribute money to community foundations without specifying how the money should be used. Others give to specific funds — for example, someone could contribute to a foundation's scholarship fund. Community trusts can also grow through pledge drives, employer-matched gifts and bequests from deceased individuals' estates.

Individuals, families, businesses and nonprofits can also set up trust funds directly with a community foundation. The entities who set up those trusts usually provide the funding either through endowments or regular monetary gifts. These trusts sometimes bear the name of the original donors who established them. Some exist as memorial funds or scholarships named to honor a deceased individual and make positive impacts.

A community foundation typically holds and manages several different funds at once. Some are designated funds, which support specific charities in the area. There are also field of interest funds, which are allocated for certain issues such as food insecurity, homelessness or the environment. Scholarships provide money to prospective students who meet certain guidelines. Finally, unrestricted funds assist with emergency needs and disaster relief.

Besides these four types of funds, community foundations many manage other kinds of trusts. Donor-advised funds are accounts established with a public charity that allow immediate tax deduction benefits to the donor. Grants can be distributed from these funds, with the donors having some input on how they're used.

Trusts created by individuals, families. businesses or charitable organizations often have their own criteria for distributing funds. For instance, a memorial scholarship may require each applicant to write an essay and submit school transcripts. Eligibility guidelines can include a minimum grade point average, being a resident of a specific community or engaging in certain extracurricular activities (for instance, a high school's marching band). These scholarships have selection committees responsible for determining eligibility, reviewing applications and awarding the funds to a deserving recipient every year.