What is a family foundation, and should I have one?

A client contacted us and asked: “What is a family foundation, and should I have one?” This isn't the first time the question has come up, so I wanted to share our answer.

A family foundation is a way to obtain a charitable income tax deduction today while distributing the money to charities in the future.  It is a not-for-profit organization that holds funds and then disburses those funds to charitable organizations.  They are recognized as 501(c)(3) organizations and the person contributing to the foundation is allowed a charitable deduction when the property is transferred into the foundation.  (There are limits on the amount that can be deducted.)   So, someone puts their money into the foundation, and then the foundation distributes it to charities.

Should you have one?  It depends.

If you have substantial charitable intents but are not sure which charity to support, or if you are not comfortable giving a large contribution to a charity all at once, a family foundation could be a great tool for you.  Family foundations are frequently created when someone has a large liquidity event, such as the sale of a business, or when someone passes away and they want a portion, or all, of their estate to be used for charitable purposes.

Often, a family foundation is set up with the family members serving on the board of directors and making decisions about how the money is distributed each year.  Parents may set up a foundation so that their children have an opportunity to work together and make decisions about what organizations to support.  The foundation can even employ family members to work for the foundation; but this is more often seen in very large foundations. 

Sound appealing?  Let’s talk about some of the advantages and disadvantages.

The Advantages of a Family Foundation:

• It allows the donor to put money aside now and decide what charity to give to later. This can be very helpful when people have a large taxable event and want to generate the tax deduction in the same tax year.
• It creates a process for giving, a formal or informal process of applications, review, and
• It provides an opportunity to involve younger generations in the giving process and expose them to stewardship.
• It can continue indefinitely, eventually leaving younger generations in charge.
• It can make contributions to individuals (i.e., missionaries or other needy people) who don't classify as a 501(c)(3) organization.

Disadvantages of a Family Foundation:

• It is a substantial investment in professional fees to get established. Expect to spend several thousand dollars to get the foundation properly established and approved by the IRS as a 501(c)(3) organization.
• As a benchmark, most private foundations start with $1M or more, but no less than $500k.
• It will likely be classified as a private foundation (one that doesn’t get money from the “public” – meaning if most of the money comes from one family, then you have a private foundation) which must distribute at least 5% of its net worth every year.
• There are ongoing costs to maintain the foundation. Expect to spend at least $1,000 a year to properly maintain the entity and file tax returns.
• Outside of hard costs, there's a time commitment to manage the foundation, make sure you’re distributing the money and accounting appropriately, and getting tax returns and legal compliance addressed.

Still sound appealing?  Great.  Let’s talk more about your interests and whether this is a good fit.

Not sounding appealing?  Understood.  There is a simpler alternative: 

Set up a donor advised fund.

You have several options for donor advised funds, here are a couple:

• You can partner with a group like your local Community Foundation. They invest the money and carry out the intent based on your guidance. They provide this oversight and management in exchange for ongoing fees.  The fees support their local staff and the efforts they make to support your local community.
• You can work with a group like the National Christian Foundation. They will often create a money market type account to hold the funds, and will give you online access to manage the account and make contributions to 501(c)(3) organizations. They, too, provide this platform in exchange for ongoing fees. The fees support their staff and their mission. 

The primary advantages of a donor advised fund is lower cost and less headache.  These benefits are clear if you’re setting aside a few hundred thousand dollars or less.  Above a few hundred thousand dollars in assets, the cost savings is less clear.  Regardless of the potential cost savings, there is a tradeoff in terms of flexibility.

• With some donor advised funds, you will not have the ability to support an individual or organization that is not a 501(c)(3), such as an individual missionary or a new organization.
• With some donor advised funds, you will be encouraged to disburse the funds over a short period of time and discouraged you from leaving funds in the account for longer periods of time. In that case, the idea of the fund continuing for future generations becomes a challenge.

If you have any questions – whether you are interested in a family foundation or not – please give me a call. I'd be more than happy to walk through what's best for you and your family. I can be reached at 765.423.7900.