Philanthropic Adventures: Family Foundations 1:3 What Is Family Philanthropy?

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Philanthropic Adventures: Family Foundations 1:3 What Is Family Philanthropy?

Wednesday, November 15, 2006

Philanthropic Adventures
Philanthropic Adventures: Family Foundations Part 1:3 What Is Family Philanthropy?

Philanthropic Adventures: Family Foundations Part 2:3 Vehicle Selection

Philanthropic Adventures: Family Foundations Part 3:3 Tax Planning

Preparing A Client For The Philanthropic Adventure

MEMORANDUM

To: Client
From: Advisor
Re: Starting a Family Foundation

Simply put, your family foundation will act as family "business" unit. Its primary purpose is to provide funding for charitable activities that interest you and other family members (board members). Your foundation's secondary purpose will be to involve your family members in an organized giving effort. A family foundation, like your business, is a formal structure that is governed by federal and state laws and regulations. The laws and regulations depend on the type of entity or vehicle you and your family selects to use. Most family foundations make gifts (or grants) to charitable organizations that carry out a charitable activity. For example, a family foundation interested in helping the homeless would probably provide money for a charity working with the homeless rather than directly providing services to homeless persons.

This memorandum is designed to help you better understand family foundations. It provides an introduction to family philanthropy and foundations; points out the different forms family foundations take; and reviews some of the issues that you and your family will want to consider when creating your foundation.

Ultimately, your family foundation will evolve into something that reflects your family and your family's values. Family foundations, by nature, develop their own style. For example, some foundations employ staff and use a very structured approach to giving, while others use the kitchen table to discuss where it will give money each year. Both styles work, it just depends on what your family wants to accomplish, and how it wants to accomplish it. There some issues that family foundations have in common, and while different family foundations may have different solutions to the same issue, it is important that you have some idea about what you are starting.

One attractive element of a family foundation is the tax benefits it affords. The government acknowledges the importance of your contribution to charity with an income tax deduction (the amount of the deduction varies depending on a number of different factors). While the media and tax advisors spend a lot of time focused on the tax benefits of charitable giving, a successful family foundation is about much more than taxes. This memorandum will only touch on the tax benefits.

What Is Family Philanthropy?
Although it has no formal definition, family philanthropy is commonly thought of as the deliberate blending of individual family members' interests and concerns into a common vision or "story," followed by implementation of a strategy intended to accomplish the family's common objectives.

Family involvement is a critical element for successful family philanthropy. The process of crafting a collective philanthropic purpose is not always an easy process, but if individual family members are allowed to communicate their personal interests, generally a family can find at least a couple of areas on which to focus. Often times, a family foundation will be dominated by its founder or the founder and his or her spouse. When this happens, the next generation family members are less likely to involve themselves in the foundation because it does not include their interests. Creating an environment that gives each family member an equal voice leads to a better experience for all family members.

Family philanthropy is not always successful. A family with communication problems will find that philanthropy may accentuate the problem rather than make it better. Family relationships are complicated and should be considered as a family enters into a philanthropic venture.


What Is A Family Foundation?
A family foundation is an organized giving effort. There is no legal term called family foundation and no mandated form. Historically, a family foundation is associated with what is called a private foundation (technically, most family foundations are organized as private nonoperating foundations). This means they do not conduct charitable activities themselves; rather, the make annual financial grants to charitable organizations. In the last 10 years, family foundations in the form of donor advised funds and supporting organizations have become very popular. These two forms were once thought of as private foundation "alternatives," but you will find that donor advised funds and supporting organizations provide tax and non-tax benefits that are not available to a family foundation organized as a private foundation, and therefore, it is recommended that you consider all three as viable options. A longer discussion of these three vehicles appears below. Regardless of which type of family foundation you choose, many of the same issues discussed in this memo apply.

The Council on Foundations, an association that counts family foundations of all sizes and types among its membership, reports that family foundations organized as private foundations "hold an estimated $86 billion in assets and make around $5 billion in grants (gifts) per year." It also reports that most family foundations have less than $5 million in assets. These statistics do not include family foundations organized as donor advised funds or supporting organizations. Many industry observers would probably agree that family foundations organized as advised funds in community foundations and other public charities and supporting organizations are growing at the same rate.

Foundation Purpose
Many clients start a family foundation without considering its purpose. Imagine starting a new business without a purpose. It is recommended that you consider purpose and discuss it with the family members you envision participating in the family foundation. A short purpose, or mission statement, regardless of how basic and broad it is, will help guide the rest of the foundation start-up process. For example, if you are considering an organization that focuses on economic development in a foreign country, it may effect the start-up strategy and entity type. Defining purpose may prove difficult. Some clients browse the newspaper for issues that they might be interested in supporting while other clients have issues that have touched their families (for example, cancer). Your foundation's philanthropic interests will change over time-that's a given-but by thinking about your foundation's original purpose you will have a very good starting point.

One strategy to determine a philanthropic purpose is to "test-drive" philanthropy before creating a formal vehicle. You could set aside a specific dollar amount for giving and then meet as a family to decide how and where to spend these charitable dollars. In the first family meeting you may want to encourage each family member to describe one issue they feel strongly about, such as the environment, and why the family foundation should support an organization in that area of interest. In the second meeting family members can bring ideas about which organizations they feel should be supported. This experience may help your family think more about the foundation's purpose. Since you have decided to create your family foundation at year-end, there is not enough time to use this strategy, but it may prove useful for starting up your foundation's giving program.

Governance
As founder, you will need to consider how to select family members to participate in the family foundation. Most often, a family foundation will include all immediate family members. This becomes more difficult as the family grows from children to grandchildren to great grandchildren. Creating a plan for ongoing family involvement in the foundation's giving activities is important so that other family members understand how the foundation operates, and so they all have an opportunity to participate. Of course, this process does not need to be in place to start your family foundation.

Another consideration is if you are going to include non-family members in the family foundation. It is a strategy that some family foundations have used very successfully to enhance the overall experience. Non-family board members may include trusted friends, experts in specific giving areas (for example, a biologist familiar with environmental issues may fit into a family's giving purpose), or business associates. Non-family board members can prove valuable in focusing the foundation on giving and keeping family quarrels outside the foundation's business.

The different types of family foundations require different approaches to governance. A family foundation organized as a private foundation will require a board of directors in a formal sense. A family foundation created in the form of a supporting organization will also require a formal board, but it will probably have non-family board members involved. And finally, if you create your family foundation in the form of a donor advised fund, you will probably create an advisory committee since a formal board is not a requirement. All three can feel the same. It is important that while all three might feel alike, all three have different legal standing and requirements.

If you are thinking that your family foundation will continue for several generations, you will need to consider how to grow the family's philanthropic leadership talent. You will find more information about this subject later in this memo under the succession planning section.

Management
After determining which family members will participate in the foundation, you will want to consider how to manage it.

Management questions include:

* Will professional staff manage the foundation?
* Does the foundation want to hire a family member to manage the foundation?
* If there is no intention by the foundation to hire staff, who will manage the foundation?
* How will the foundation identify organizations and causes?
* Will the foundation have formal policies regarding board involvement or grantmaking?

Like any organization, there are many management questions for a family foundation to consider. A foundation that intends to give to the same charities that its family (board) members have had long-time relationships with will not face the same management challenges as a foundation that intends to make charitable grants for economic development when a family has no real background in the issue area.

Management takes various shapes. In some cases, a client will think about the management issues and decide to select the vehicle with the least amount of management. In other cases, a client wants family members to learn how to operate a formal structure.

Click here to read part two of this three part series on Adventure Philanthropy: Family Foundations and Philanthropic Travel.

Tags: Foundation Source, Adventure Philanthropy, Philanthropic Travel

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Becoming a Philanthropist
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The Wisdom of Stone Soup
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Affluent Parents Dedicated to Instilling Philanthropic Values in their Children