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Houston Estate Planning and Probate Blog

Thursday, August 15, 2013

Family Foundations: What, Why, and How

Families with significant net worth who have a tradition of philanthropy often consider establishing a charitable foundation as part of their estate plans.   While there are a number of advantages to using family foundations as a philanthropic vehicle, families need to seek guidance from estate planning and tax professionals to ensure it is the best option for achieving their objectives.

According to The Foundation Center, there are over 35,000 family foundations in the US, responsible for more than $20 billion in gifts per year.   While some foundations have tens of millions in assets, more than half report holdings totaling less than $1 million.  

Advantages

Minimizing various tax burdens is one benefit of creating a family foundation.  However, if tax issues are your primary concern, then a different asset management and distribution vehicle will probably better suit your needs.  While it is true that family foundations offer certain tax advantages—both in terms of current income tax obligations and future estate tax burdens—family foundations are also under many legal and regulatory obligations. These ongoing obligations mean that your family should choose to build a family foundation only if ongoing philanthropic giving is an enduring family goal.

Non-tax-related benefits of a family foundation include the following:

  • Managing the foundation may provide employment for one or more family members
  • A family foundation allows founders to involve family members in family wealth management, especially those who lack interest in the family business
  • The foundation founder can maintain influence over recipients of charitable giving for generations to come
  • A family foundation makes an excellent repository for all charitable giving requests.  A formal process can be established to ensure grant applicants are not arbitrary.
  • A family foundation can serve as a formal manifestation of a family’s philanthropic culture.

Types of Family Foundations

There are many different types of family foundations, each with certain advantages, disadvantages, and tax and regulatory obligations.  The main types of family foundations include:

  • Private non-operating family foundations which receive charitable donations from the family, invests those funds and makes gifts to other charitable organizations or individuals.
  • Private operating family foundations which actively engage in one or more philanthropic activities, as opposed to making donations to other foundations that perform active charitable work.
  • Supporting organizations which are designed to provide financial support to one or more specific public charities
  • Publicly supported charities can be seeded with family philanthropic funds but then also take donations from the public. Publicly supported charities must meet specific Internal Revenue Service requirements to maintain their status as publicly supported charities.

Issues to Consider when Establishing a Family Foundation 

  1. How much money do you plan to give to the foundation at its inception?
  2. Do you anticipate volunteer help from your family to run the foundation, or will the foundation need to pay one or more salaries?
  3. Does your family wish to support one or more specific charities, or do you want to fund a foundation which can ultimately choose among other charities in specific fields of philanthropic work?
  4. Does your family want to actively engage in philanthropic work or make gifts to other organizations that are already engaged in such work?
  5. Does the foundation founder prefer to exert strict control over gifts the foundation makes, or only to generally specify the types of philanthropic work he or she wishes the foundation to support?

Once you and your family have carefully thought through these considerations, you should consult with an estate planning attorney and other tax advisors to determine which type of family foundation most effectively meets your family’s giving objectives.


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