How Do I Start a Family Foundation? Next item Family Mission Statement: 2020

How Do I Start a Family Foundation?

Many families with philanthropic goals consider forming family foundations. In this article, we discuss the steps to forming a foundation, as well as the key differences between a foundation and a donor-advised fund.

Key differences between a Private Foundation and a Donor Advised Fund

The first step in establishing a foundation is determining if it will best meet your objectives, or if you will be better served through a donor-advised fund. There are many benefits of forming a foundation rather than a donor-advised fund, including:

  • Having legal control over the charitable vehicle – When contributing to a donor-advised fund, you and your family irrevocably make a donation to a large public charity which then has legal control over the funds. You will have the right to make recommendations for grants and for investments, but you are not in legal control.
  • Having control over the delivery of grant checks – Donor-advised funds deliver grants per the policies and processes in place at the sponsoring organization, and typically deliver them directly to the charity. With a foundation, you may choose to hand-deliver the grant if desired.
  • Investment options – Typically, you may select investments from a limited menu of funds or pools provided by the donor-advised fund sponsor, or can in some cases hire an advisor to manage the assets; however, all investments are subject to the approval of the donor-advised fund sponsor and can change over time. Foundations are generally more flexible with regard to the investment program.
  • Having a staff (including family) and paying expenses associated with grantmaking – Outside of paying the investment advisor and the donor-advised fund’s plan sponsor, other staff expenses can generally not be paid out of a donor-advised fund, while there is more flexibility to do so from a foundation.  
  • Broader group of grant recipients – Foundations have greater flexibility than donor-advised funds in a few instances, such as some international giving, scholarships, and in some cases hardship grants. 

Since Private foundations have higher administration requirements than donor-advised funds, it is helpful to consider your objectives and whether they may be better met through a donor-advised fund. For instance, foundations are required to distribute 5% of assets each year and pay an annual 1-2% excise tax, and are required to file a tax return that publicly discloses the name of the donor as well as all of the grants. These requirements deter some families from moving forward with a foundation and instead look to use a donor-advised fund that currently does not have an annual distribution requirement and also has more anonymity. Contact us to discuss your options and whether a foundation or a donor-advised fund may better suit your needs.

Steps to starting a Foundation

Once you determine that a private foundation is the right vehicle for your philanthropic program, there are some initial setup costs to get it going. It is best to work with your financial advisor as well as an attorney and a CPA to make sure that it is being set up correctly and no steps are overlooked. Some initial steps and decisions include –

  • Establishing the formation documents of the foundation and applying for a Tax Identification Number. Note that this can be done in Trust or Corporate form, and an attorney can help with the decision on which makes more sense.
  • Drafting a Tax Exemption Application for the IRS – Once filed, it can take the IRS months to review, but once exemption is granted, it is retroactive to the formation date.
  • Drafting a Conflict of Interest Policy, to be submitted with the tax exemption application to the IRS.
  • Registering with the State Attorney General’s Office as a newly formed charitable entity.
  • Determining when, with what assets, and how much to initially fund the foundation. The answers to all of these questions will have an impact on how much can be deducted by the donor at funding. For example, donations of cash to a foundation are limited to 30% of AGI, where donations of long-term publicly-traded securities is limited to 20% of AGI. The deduction limit for the same donations to donor-advised funds is higher, at 60% and 30% respectively. 
  • Establishing operating procedures such as:
    • Will there be a board, will family members be included, and what is the succession plan?
    • Who will be responsible for investment management?
    • Are there specific philanthropic goals that should be captured in a mission statement?

Once the foundation is set up and funded, it can be a great opportunity for a family to accomplish many objectives, including philanthropic, family mission, and legacy. It can also be a rewarding opportunity to educate and engage multiple generations for years to come.