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· Advantages and Drawbacks
· Starting a Foundation
· Foundation Services
Private Foundations
Many individuals and families are starting their own family foundations for the purpose of controlling the use of their charitable dollars and as a way to transfer family values and teach subsequent generations the importance of contribution and community involvement. Family Foundations are private philanthropic endowments that allow families to manage and oversee their charitable activities. Donors can receive estate-tax, gift-tax and income-tax deductions.
Family foundations account for a major portion of foundation giving in the United States. Families manage two-thirds of the approximately 40,000 private foundations and make grants totalling more than $7 billion per year. An outgrowth of this philanthropic evolution is the need and demand for effective family foundation management.
A Private Family Foundation is a separate legal entity, privately funded by you. It must be created with charitable "intent", that is for the specific purpose of contributing to various charitable causes. A trustee or executive director manages the Foundation and oversees the Foundation's investments and distributes the Foundation's assets. (You can appoint yourself as the trustee.) The donor can maintain control over the assets contained in the Foundation enabling them to monitor favorite charities. If one non-profit changes its focus, or if a more meaningful cause comes along, you can reallocate your Foundation's support.
Foundation features
- Must distribute a minimum of 5 percent of the fair market value annually
- An annual excise tax of 2 percent on net investment income
- Avoids capital gains tax on the sale of appreciated property contributed to the charity of your choice.
- Minimizes your estate tax liability.
- Gives you more control than a Donor advised fund or charitable support organization
- Creates philanthropic training ground for family (can provide employment and activity for your family members)
- Allows family involvement after your death (identifies and preserves your family name for years to come).
The typical donor:
- Has a larger than average estate.
- Wants to time the gift to his or her tax situation.
- Wants maximum control over giving.
- Desires to involve family and heirs in gift-making decisions.
- Wants to give now, but not sure which charity he or she wants to benefit.
Advantages & Drawbacks of Private Foundations
Advantages
- Tax benefits to the Foundation
- Family Foundations have special tax advantages, because of their classification as, "charitable organizations." Any earnings on Foundation assets are tax-exempt and thereby avoid the income tax, which means more money can instead be used to help the supported charities and causes.
- Tax Benefits to the Donor
- Capital gain tax benefits - If you have highly-appreciated assets that you're holding to avoid steep capital gains taxes, a Private Family Foundation could help. Any appreciated assets that you transfer to a Private Family Foundation can be sold by the Foundation with no capital gains taxes. This is because of the Foundation's charitable status.
- Income tax benefits- you can get an immediate tax deduction for any money or property to grant to the Foundation. This deduction can equal up to 30% of your adjusted gross income (20% for appreciated property). Any income tax deduction not used in your contribution year may be carried forward over the next five years. The valuation of these deductions depends on a number of things, including original cost and the type of property being transferred.
- Estate Tax Benefits - Every dollar that you contribute to your Family Foundation represents one less dollar that is included in your taxable estate. If you are in a higher tax bracket that could ultimately save up to 50% in estate taxes. Gifts made to your Family Foundation do not impact the $11,000 annual gift tax exclusion or the Unified Exemption.
Drawbacks
- There are up-front legal costs and ongoing administrative costs that make it cost prohibitive for many estates under $2-3 million. Your Private Family Foundation must also be legitimate, you must keep books and records to show how you arrived at your decisions, and establish strict rules prohibiting self-dealing. Salaries must be earned, with enough documentation to show that work was actually performed. Tax returns must be filed annually.
- There are also potential excise taxes, and significant penalties if the minimum 5% annual distribution is not adhered to or the other prohibitive transactions occur such as self-dealing, excess business holdings, speculative investments, and lobbying efforts or other noncharitable distributions.
Required Distributions to Charities
Private Family Foundations have certain laws they must abide by, because they are a legal entity. For instance, by law, a Private Family Foundation must distribute at least five percent (5%) of its assets each year to public charities. Assume you leave $2,000,000 to your Private Family Foundation. The IRS says you must distribute at least $100,000 (or 5%) to recognized charities in order for the Foundation to qualify for its special tax advantages. Of course, you can select a higher payout if you choose. But five percent is the absolute minimum. The annual payout is established when you first sit down with a qualified estate attorney who has experience working with large estates. And the difference between what the assets earn (e.g. 10% per year) and the mandatory payout can be put back into the Foundation.
Employment for the Family
You may arrange for your heirs and descendants to receive salaries as "employees" of your Foundation. Simply name family members as replacement trustees to succeed you after death or resignation. Many Foundations pay their directors using the difference between their required distributions and their annual income. If your Foundation is earning 10% annually on its assets, but only paying 5% annually to charities, the difference can be distribute for legitimate expenses, including salaries for the directors of the Foundation.
What Are the First Steps in Starting a Family Foundation?
Some of the issues that need discussion and clarification prior to creating a family foundation are listed below. If you're considering the creation of a family foundation, here are some important points to discuss and clarify as you proceed. Be sure to consult qualified and experienced legal counsel on this complex subject.
Pre-Establishment Planning
- Choose organizational structure
- Choose initial board members
- Retain qualified counsel
- Determine the areas of need that the foundation will support
- Begin long-range planning
- Consider staffing
Establishing the Organization
- Identify governing instruments
- Fund the equity
- Apply for tax-exempt status
- Complete state filings
Begin Operations
- Initial meeting
- Record keeping
- Investments
- Business plan
- Grantmaking policies
- Guidelines
- Other details
Strategic Philanthropic Planning
To secure the value of the family foundation, SFI provides access to essential strategic planning services to founders, family members and boards of directors. We will:
- Assist the founder(s) in developing the mission, vision and values that best reflect his or her core values and philanthropic philosophy, creating the foundation and the framework that gives energy to the foundation.
- Design the foundation governance, operational plan and succession strategy. The foundation needs to build a structure that will be effective and efficient, honoring the founders legacy by encouraging the flexibility, creativity and energy of future generations.
- Develop the guidelines, criteria and procedures of the foundation's grant-making activities. This is the business of the foundation. Doing it well assures the greatest impact on the community and greatest pleasure for the family.
- Provide a family forum to discuss critical issues related to wealth, values, responsibility and public service. We design and facilitate one-on-one training and consultations, as well as family retreats and workshops.
- Facilitate and coordinate the services of the founder's professional advisors, to assure the consistency of financial, tax and estate planning strategies with the founder's philanthropic goals.
Grant Administration Services
SFI provides access to experienced administrative support to make the business of the foundation easier and more enjoyable. To facilitate this, we provide assistance to:
- Build systems and procedures for in-house grants administration. For those foundations that want to handle the grant making activities internally, we help identify, compare and design grants administration and financial accounting software, develop appropriate record keeping and file maintenance, establish grant monitoring, and assure fiduciary standards and compliance.
- Offer out-sourcing for grants administration and compliance. For those foundations that prefer not to handle the day-to-day operations, we are available to respond to inquiries (written, electronic or telephonic), screen and process grant requests and applications, conduct applicant site visits, communicate with grantees, monitor pending and completed grants, and maintain permanent records.
- Provide 24/7 account access. Each foundation can access its account via our secure, password-protected, and daily-updated Web site. The account reflects daily asset values, pending and completed grants, minimum distribution requirements, grant criteria, favorite charities and other important information available only to foundation-approved representatives.
- Develop criteria for measuring and monitoring the effectiveness of grants. Most foundations understand the importance of monitoring and evaluating their investment results, but few apply this approach to the performance of their grants. We believe that most foundations want to impact their community through grants that make a difference.
Reporting and Compliance
Because all foundations are required to report to state and federal agencies, we are available to manage that responsibility, eliminating the burden on the family. We will:
- Provide tax information for the foundation's accountant to prepare state and federal tax returns. Prepare reports for filing with the appropriate Attorney General and/or Secretary of State of the state in which the foundation operates.
- Host annual and/or periodic foundation board meetings, and prepare the necessary minutes of meetings or reports of the board.
- Provide notices, reports and other communications as required for board members, committee members, affiliated organizations or related charities.
Fiduciary Advisory Services
Foundation directors and trustees have a fiduciary obligation to manage the assets prudently, impartially and in the best interest of the foundation. We understand the unique requirements of foundation investments and their relationship to family wealth. It is good business and good management to assure compliance and adherence to sound investment policies and procedures. We:
- Assist the board in developing investment policies clarifying investment objectives, defining risk parameters and determining appropriate strategies.
- Help the board identify and interview investment professionals, including investment consultants, asset managers, as well as custodians.
- Provide independent and impartial advice to boards and managers, consistent with written investment policies, as well as state and federal law.
- Teach board members and family the principles of investments, fiduciary standards and accountability.
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