7 Signs You’re Ready to Start a Family Foundation (and 4 You’re Not)
Thinking of setting up a family foundation? Find out whether your goals and circumstances make you a good candidate—and what your other options are if not.
Maybe you’re looking to turn your family’s good fortune into a lasting charitable legacy. Or maybe you support charities already, but you want to give in a far more structured way.
Whatever the reason, you’re considering setting up a family foundation—a private foundation whose funds come from a single family, as the Council on Foundations defines it.
But before you take the next step, you need to know if it’s a good match for your goals and circumstances. So we’ve collected some of the top signs a family foundation might be right for you. We also cover some alternatives to consider if not.
Remember, this overview doesn’t address every situation. It also shouldn’t be read as financial or legal advice. But it should give you a sense of whether it’s worth exploring the idea of a family foundation further, perhaps with your financial adviser. If you see yourself in these descriptions, you might be a good candidate to move forward.
Signs You Might Be Ready for a Family Foundation
You may want to continue exploring a family foundation if…
Your Goals & Priorities
1) You care about leaving a family legacy.
One of the first steps in establishing a family foundation is writing a mission statement. This statement is an outline of your family’s “pillars of giving,” as wealth management expert Felix Meneses calls them. The act of writing it forces you to think through your values and record them in a lasting way.
For example, the Tracy Family Foundation mission page lists five practices the founders’ parents held dear, including education and religious faith. These values guide the foundation’s grant programs, which largely support local school districts, nonprofit youth programs, and Catholic schools. Robert and Dot Tracy may have both passed on, but more than 100 members of their family are still working to advance the causes they cared about most.
So in a sense, a family foundation becomes a concrete expression of your beliefs. And with enough care and planning, those beliefs can live on influencing the world indefinitely for generations.
(Unless, that is, you subscribe to philanthropist Chuck Feeney’s “Giving While Living” philosophy. That approach encourages funders to spend down their assets during their lifetimes.)
2) You want to prepare your successors for the future.
According to a widely cited study by financial consultancy firm The Williams Group, as many as 90% of wealthy families lose their fortunes within 3 generations.
But a family foundation creates a lasting structure for preserving wealth—and for teaching younger generations how to steward it responsibly. That’s because many family foundations design ways for kids and young adults to participate. Some even create “junior boards” staffed by teenage family members, who advise the primary board on a portion of the budget.
3) You have a philanthropic vision to pursue.
Typically, family foundations don’t deliver services directly. Instead, they issue grants to other nonprofits they believe in. But that doesn’t mean they don’t need their own strategies for fostering change.
For example, the Perrin Foundation supports “youth-led social change,” which stresses teaching kids and teens organizing skills so they can advocate for their own causes. And the Russell Family Foundation practices “community-centered philanthropy,” which involves partnering with local experts to develop programs.
So if you’ve got an idea for improving your community or tackling a particular problem—or if you’re intrigued by the prospect of developing one—you might be a good candidate to launch a foundation.
Conversely, if you don’t have at least a general approach in mind, you may want to hold off. Without a specific purpose for setting up a family foundation, you might be better off pursuing philanthropy in other ways for now. You can then return to the idea when you have a clearer picture of what you want to accomplish and how.
Your Circumstances
4) You’re ready to make a serious financial commitment.
A private foundation involves some notable costs to set up and operate, including legal fees, financial services, and potentially salaries for staff. So it doesn’t make sense to invest in those overhead costs if the foundation won’t have a fair amount of capital to manage.
Sources vary on the exact amount you need to commit up front, but there are a few rules of thumb. The American Endowment Foundation says you need at least $3-$5 million if you plan to hire staff to administer the foundation, or about $500,000 if you’ll leave that work to a third-party service. Foundation Source cites similar funding requirements, too.
(It’s worth noting here that “funding” can include stock, real estate, and many other asset classes, not just cash.)
Make no mistake: you don’t need to be a millionaire to advance a charitable cause. It’s just that if your budget is below that range, using a giving vehicle with lower overhead might make more sense than starting a family foundation.
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5) You’re anticipating certain life events.
You can set up a family foundation any time. But there are circumstances when it’s especially attractive. These include:
Selling a business
Foundation stock investments can grow indefinitely with an excise tax of just 1.39% on the gains, according to Fifth Third Bank. So if you’re in the process of selling your business, donating a portion of its shares to a foundation can substantially reduce your tax liability.
Experiencing a “liquidity event,” such as an inheritance or a court judgment
Per Foundation Source, a foundation can be funded with real estate, tangible assets like jewelry and antiques, and even intellectual property like patents. So if you donate these assets when you acquire them, you can potentially avoid both tax and legal headaches. And of course, doing so also lets you share your good fortune with others.
Retiring
Starting a family foundation appeals to many retirees who want to give back after a successful career. It also lets them apply their professional skills to a new venture, and provides a sense of purpose, all while protecting their wealth from estate taxes.
6) These tax considerations suit you.
There are several potential tax benefits to starting a family foundation. Here are a few listed by Aspiriant (though note this is far from a complete picture).
- Reduce income taxes. Donations to your foundation are generally tax-deductible, though limits might apply based on the type of asset and your adjusted gross income.
- Limit taxes on investments. Instead of paying up to 20% in capital gains taxes like individuals do, foundations pay about 2% on their net investment income.
- Eliminate estate taxes. Foundations pay no estate tax when they’re the beneficiary of an IRA, life insurance policy, or charitable remainder trust.
- Realize your tax benefit immediately. Though your foundation can dole out grants over many years, you can often deduct your full contribution to it all at once if you choose.
Still, advisers say tax advantages shouldn’t be the main reason you start a family foundation. That’s because typically there are far simpler ways to obtain the same or greater benefits, such as giving to existing charities or contributing to a donor-advised fund.
“It is a feature, it is a factor, it is a facilitator,” Douglas Freeman, former chairman of the Institute for Family Foundations, once said of the role tax planning plays in setting up a foundation. “It is not the cause.”
7) You can handle the time and energy commitment.
A family foundation is potentially much more hands-on than other forms of giving. You can expect to invest significant time up front to establish a board of directors and flesh out your mission. After that, state law usually requires the board to meet at least once a year, though Foundation Group says four times a year is best practice.
From there, you might spend time supervising grantmaking rounds or directing the foundation’s strategy and finances. You could also largely hand those responsibilities over to staff or outsource them to a third party. That means the commitment can range from as little as a few hours per quarter to something like a full-time job.
Regardless, you should be prepared to participate regularly in your foundation, not just “set it and forget it.”
Family Foundation Caution Signs
You may want to proceed carefully before jumping into a family foundation if…
- You’re wary of the compliance rules. As Investopedia puts it, “One of the greatest difficulties in managing a family foundation might be trying to unravel the complicated rules that the IRS sets for them.”
- You primarily want to maximize the financial benefits of giving. Foundations offer plenty of tax advantages. But so do other forms of charitable giving that involve less effort and expense.
- You want to let your capital grow indefinitely. Unlike donor-advised funds, foundations must distribute at least 5% of their assets in grants each year, regardless of strategic concerns or market conditions.
- You value privacy in giving. IRS reporting requirements mean that your foundation’s investments and grants are public information. There are no “anonymous gifts” from family foundations.
Family Foundation Alternatives
Not sure if a family foundation is for you? Here are a few alternatives to consider.
Opening a donor-advised fund, or DAF
This simple giving vehicle costs far less than a foundation to create and maintain, so you can open one with a much smaller investment. Simply make a contribution to the fund, take an immediate tax deduction on the full eligible amount, and then recommend grants to charities whenever you wish.
Creating a public charity
Instead of fully funding a nonprofit yourself, you could start a charity that raises funds from the public. This may require less startup capital, though it presents its own set of challenges to run successfully.
Starting a supporting organization
A supporting organization is a specific type of public charity that exists to support another public charity. Essentially, it’s a hybrid. It can be funded by a small group of private donors like a family foundation. But it’s regulated more like a public charity because of its function. So, if the regulations around private foundations concern you, this option might be worth a look.
Giving charitable gifts
No muss, no fuss: just donate cash, stock, or other assets directly to one of the U.S.’s more than 1.5 million registered nonprofits.
Possible Next Steps
If you’d like to learn more about setting up a family foundation, you can…
Speak to your financial adviser.
Tax and finance considerations are highly specific to your circumstances. If you’re interested in moving forward, your adviser can help you understand how a family foundation would impact your financial future.
Reach out to nonprofit experts.
Organizations like the Council on Foundations and the National Center for Family Philanthropy host conferences, run workshops, and help funders connect through peer network programs. Get involved to meet experts who can help you get started.
Start following philanthropy news and trends.
The philanthropy world is evolving rapidly, with interesting debates happening around trust-based giving, impact investing, and much more.
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