When Does a Family Foundation Make Sense?

If you’d like to make a long-lasting, charitable impact on the world, there are many ways to go about it. But if you want to leave a legacy that will remain with your family for generations, as well as save taxes, then consider a private family foundation.

A family foundation is a tax-exempt organization that does not qualify as a public charity itself. Instead, it’s structured to give to multiple charitable causes. It is administered by a board of directors, which typically includes the family patriarch and/or matriarch, in addition to other relatives or close personal advisors who are familiar with the family’s philanthropic goals.

If you answer yes to most of these questions, then a family foundation might be right for you:

  • Do you want your family to have a say regarding the organization’s expenditures and gifts to charities?
  • Do you wish to maintain control over how your contributions will be invested?
  • Do you desire name recognition?
  • Are you open to dealing with some administrative requirements in carrying out your planned giving strategy?
  • Do you wish for family members to be actively involved in your philanthropy — possibly even serve as members of the board?

A family foundation offers many benefits, but it also has some strict requirements.

Private foundation tax advantages

With a private family foundation, you get several income and estate tax benefits.

  • Income tax deduction — You can donate a variety of assets including cash, publicly traded securities, stock in privately held companies, real estate, artwork and collectibles. Cash and publicly traded securities donated to the foundation are assessed at their current value to determine the amount of the tax deduction. Deductions for donating other assets may be limited to basis. Also, adjusted gross income (AGI) limitations apply.
  • Immediate tax benefits — Grants from private family foundations to their selected charities may be spaced out over multiple years, with a minimum distribution of 5% of total assets every year. But you get to deduct the entire amount contributed in the current tax year, or over five years if the gift exceeds AGI limitations.
  • Limited taxes on investment income — The IRS levies a 2% tax per year on the foundation’s net investment income. This is a big tax break compared to an individual’s tax on capital gain, which is currently up to 20%.
  • Estate tax avoidance — A foundation can be named as the beneficiary of an IRA, a life insurance policy or a charitable remainder trust, all of which pass to the foundation without incurring any estate tax. This is particularly helpful if your estate’s value exceeds the estate tax exemption, which for 2018 is $11.18 million per person.

The family stays in control

The family board retains control over the contributed assets and distributions to charity. The board works with its own financial advisor to invest the assets to best support the long-term philanthropic mission. And it can revise the foundation’s mission over time to reflect their current philanthropic goals.

In addition, many of the clients we work with point to generational educational benefits. Younger family members involved in the organization learn to appreciate the rewards of serving their community, as well as gain more practical lessons in handling money, choosing investments, managing the grant-making process, and negotiating family differences of opinion.

Other important things to know

In exchange for the benefits of a family foundation, there are some requirements you should feel comfortable with before choosing this charitable structure.

  • The family must remain actively involved — This is not a “set it and forget it” activity. You should desire and be prepared to give assets in an amount significant enough to warrant the costs of a foundation’s formation and maintenance, generally at least $5 million either initially or over time. In addition, you and your family need to be willing to assume the ongoing responsibility of managing such a foundation.
  • Federal and state requirements must be met — Tax-exempt status must be obtained, and state and federal filing requirements, such as Form 990, need to be followed. In addition, due to the level of control the founder retains, various rules regulate a private family foundation’s investments, distributions, expenditures and transactions which, if violated, could result in penalties including termination of the foundation.
  • Contributions to the foundation stay with the foundation — Assets are permanently allocated to support the family’s charitable initiatives and cannot be passed down through inheritance. Also, gains on the assets cannot be paid to the founders or heirs.
  • There are limits to grantmaking — You cannot use the family foundation to satisfy personal pledges, buy a table at a charitable event, or give cash or property to a government official.

As you can see, setting up a family foundation is complex and should be done with careful thought and planning. It takes an advisory team — including your financial advisor, CPA and estate planning lawyer— to do it right.

A family foundation makes the most sense for someone who is already inclined to support charities in a significant, long-term way. But other charitable structures should also be explored. Be sure to consult your advisory team to help you select the best option to achieve your family’s financial goals and philanthropic aspirations.

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