G. Rhodes Craver, ESQ
Kennon Craver, PLLC
Many of us make annual gifts to charities, our church, an alma mater, or some other worthy charitable organization. But beyond this annual giving, some individuals or families may have a desire to set aside a more meaningful amount of their net worth to achieve larger philanthropic objectives. One way this goal can be achieved is through the creation of a private family foundation that you fund and operate.
Like public charities, private foundations are established under section 501(c)(3) of the Internal Revenue Code. Unlike a public charity, a private foundation typically makes donations—or grants—to other charities. Private foundations make grants either to fund an organization’s general operating expenses or to fund specific programs of interest. They can also make grants to individuals if they follow Internal Revenue Service (IRS) rules. To maintain tax-exempt status, the activities of a private foundation, like those of a public charity, must benefit the public.
Creating a private foundation may appeal to those families with strong philanthropic values and a willingness to commit the resources—both time and money—necessary to make the foundation a reality. And because a foundation can exist in perpetuity, attaching the family name to a legacy of giving in this manner can help ensure that it continues through the generations.
The threshold issue for seriously considering a family foundation is determining if you have sufficient financial resources to commit to the foundation to make it economically viable as an operating entity. While there is no bright line test for determining the amount necessary to fund a viable family foundation, I recently consulted with a family foundation manager on this issue, and his response was that it would take a minimum of $2 million—and more likely $5 million—to really make a family foundation an economic reality.
In today’s environment, running a foundation requires a good deal of time and effort simply to meet the burden of complying with the tax regulations governing these entities. To justify that time, effort, and expense takes a significant financial commitment from a family wanting to create a foundation. This funding threshold is pretty high and would likely dissuade many from considering a family foundation. For those unable or unwilling to commit resources at such a high level, a donor-advised fund may be an attractive alternative that can mimic much of what a foundation does without the time and expense of the foundation.
A donor-advised fund is a philanthropic vehicle established at a public charity. This vehicle allows donors to make a charitable contribution, receive an immediate tax benefit, and recommend grants from the fund over time. In the simplest of terms, a donor-advised fund is like a charitable savings account. Donors contribute to the fund as frequently as they like and then recommend grants to their favorite charities when they are ready. The focus of this article is not on donor-advised funds, but more information is readily available at your local community foundation.
If you’ve crossed the financial threshold and are willing to fund a family foundation at a level that makes it economically viable, what other considerations should be top of mind when deciding to create a foundation? Without a doubt, the single most important consideration is the degree of control the family would like to have over the foundation.
There are two important aspects of this control issue:
• Do you want to control how the money is invested after it has been contributed to the foundation?
• Do you want to have control over the grants the foundation makes to charities?
Having control over grants involves the review of grant proposals and, often, monitoring of the use of the grant after the money has been given to the charity. Some families want that sort of involvement with the charities they support. Others do not. While such involvement can be meaningful, it is also time intensive. If the family has the time and interest to be that involved, a family foundation can be a great vehicle to further family philanthropic objectives. If that level of control is not essential to the family, then a donor-advised fund may be a more effective alternative.
While the issue of control is generally the most important consideration, there is a second key issue to be considered: privacy. A family foundation is required to file an annual tax return with the IRS. These tax returns reveal a great deal of information about the foundation and, unlike individual income tax returns, are public information. If a family values its privacy and wishes to remain anonymous about its charitable giving, then the family foundation is likely not the right vehicle. Once again, a donor-advised fund may be a better alternative.
Under the right circumstances, a family foundation can create a powerful and lasting legacy for a family with a meaningful philanthropic orientation. However, to determine whether it is the best vehicle to achieve your family’s charitable objectives, it’s important to consider the amount of resources—both time and money—you are willing to commit to the endeavor, the amount of control you would like to have over investing foundation assets and giving, and how you feel about your family’s charitable giving being made public.
While family foundations can be relatively time consuming and expensive to set up and operate, the thousands of individuals and families who have established them clearly suggests that these sacrifices are worthwhile.
ISSUES TO CONSIDER
A donor family should carefully weigh these factors when assessing whether a family foundation vs. a donor-advised fund is the right vehicle for the family’s philanthropy:
• Are you willing to commit a minimum of $2 million to upward of $5 million to start a family foundation?
• How important is it to you to control the investment of foundation assets and grant making?
• How important is it to keep your family’s charitable giving anonymous?
• Council on Foundations — www.cof.org
• Starting a Private Foundation: Carrying Out the Donor’s Intent by Paul K. Rhoads and Stephanie H. Denby — available at www.philanthropyroundtable.org
About the Author:
G. Rhodes Craver is a Certified Public Accountant, founder, and managing partner of Kennon Craver, PLLC, in Durham, North Carolina. He practices in the areas of estate planning, estate and trust administration, tax planning, and closely held business planning. Craver is a member of the North Carolina Bar Association and serves on the boards of the Asheville School and Galloway Ridge Retirement Community.