Five Reasons to Set Up a Family Foundation (and Three Primary Considerations)

Your last name doesn’t have to be Rockefeller, Carnegie, or Ford for you to think about setting up a family foundation. In fact, according to the Stanford Social Innovation Review, 90% of all foundations have endowments of less than $10 million — and these are mostly small family foundations. 

Your last name doesn’t have to be Rockefeller, Carnegie, or Ford for you to think about setting up a family foundation. In fact, according to the Stanford Social Innovation Review, 90% of all foundations have endowments of less than $10 million — and these are mostly small family foundations. 

Furthermore, the Council on Foundations states that while the asset size of family foundations ranges from a few hundred thousand dollars all the way up to more than $1 billion, 3 out of 5 family foundations hold assets of less than $1 million.

The most common form of private family foundation is a nonprofit organization with tax-exempt status under Section 501(c)(3) of the IRS tax code. The foundation’s creator(s) contributes funds comprising the foundation’s endowment, which is then invested so as to generate income for the foundation to give away. A foundation is required by law to pay out at least 5% of its assets each year in the form of grants to charitable organizations (although many donate even more).

A Quintet of Incentives

So what’s in it for you? Quite a lot! Benefits range from cut and dried financial perquisites to warm and fuzzy spiritual and emotional advantages. Let’s look at five  reasons you should consider setting up a small family foundation along with three key considerations to bear in mind. First, the benefits:

1)    Giving through a foundation magnifies your philanthropic impact far beyond that of giving as an individual. In return, you get significant tax savings both during your lifetime and for your estate. You can:

• Get an income tax deduction for each year you contribute to your foundation

• Avoid capital gains taxes

•  Reduce estate taxes — or even eliminate them altogether

2)    By creating a foundation, you’re cementing your personal legacy as well as your family’s. The aforementioned tax breaks help to grow your charitable funds, control of which can then be passed down to future generations, enabling them to continue your philanthropy.

3)    Private foundations can do things other types of charitable vehicles can’t. For starters, they can pay expenses. They also can hire staff, including members of the family. Just make sure their job duties are legitimate and that their compensation is fair and reasonable. 

4)    Managing the foundation brings the family closer together while instilling in them a spirit of giving back; it also allows for continuity of charitable giving.

5)    Participation in a family foundation fosters increased social consciousness, builds useful life skills, and increases personal fulfillment, all while making a positive difference in the world:

• Multiple generations get to know one another on a deeper level by discussing truly important issues; in addition to developing greater social awareness, family members learn to be competent leaders, investment managers, negotiators, and more.

•  Furthermore, research shows that altruistic activities such as philanthropy make people happier. Helping others, it turns out, is more fun than merely enjoying oneself.

A Trio of Caveats

Now that you’re on board with the idea of setting up a family foundation, here are three essential decisions you’ll face when doing so:

1)    What your foundation is going to stand for

2)    Its giving strategy

3)    The governance behind it

Only you (perhaps in consultation with your family) can answer those first two questions. As to the third, don’t try to go it alone; enlist expert help from the get-go. Either find a lawyer and CPA (or a lawyer/CPA) who specializes in foundations or turn to a national service such as Foundation Source, to step you through the process of incorporating as a 501(c)(3) nonprofit. 

You may also want to outsource investment and/or administrative management, at least initially In addition, you’ll need that specialist CPA again when it comes time to file your first annual 990PF tax return, which must be made available for public inspection.

The Bottom Line

By setting up a family foundation, you’ll be part of an impressive and growing trend. The number of such foundations — and their combined impact on giving — have skyrocketed in recent years. The Giving Institute estimates that approximately half of all the registered foundations in the USA are family foundations; together, they account for 44% of all foundation assets. Nearly 70% were created after 1990, so most family foundations are only one generation old.

Once you’ve got your official 501(c)(3) status, you’ll need to establish a board of directors, compose a mission statement, draft some bye-laws, and establish a grant application and review process. (See our previous blog post for a checklist of best practices.) 

Your foundation should have an online presence, too: a website, social media accounts, and up-to-date listings in foundation directories such as Candid’s Foundation Directory Online and on Charity Navigator. In an upcoming blog post, we’ll tell you why and how-to.

Then go forth, give back, and make the world a better place!

There are other tax-sheltered philanthropic vehicles for charitable giving. The most common of these is a donor-advised fund — DAF for short. In a future blog post, we’ll explore a comparison of private foundations vs DAFs and other options.