Family Foundations: What Are They and When to Consider Creating One
If you’re part of a super high net-worth family, you’ve probably thought about ways to give back to society while managing your family’s wealth. One such avenue is establishing a Family Foundation. They aren’t just about giving; they provide a structured way to manage family assets, plan taxes, and create a lasting legacy.
What is a Foundation?
At its simplest, a foundation is a nonprofit organization you set up and fund to support charitable causes. Foundations come in different types. For example, private foundations are often created by a single individual, a family, or a corporation and usually receive funding from one primary source. In contrast, public foundations such as community foundations receive support from the general public.
A Donor-Advised Fund (DAF) is another philanthropic vehicle established as a public charity. The donor contributes to the fund and recommends grants to their preferred charities from that fund. DAFs are increasingly popular due to their simplicity and lower costs than private foundations. Note that a DAF cannot be used to fulfill a pledge and contributions from DAF’s must be made to public charities.
Diving Deeper into Family Foundations
Family Foundations are a subset of private foundations, typically established by a family using long-term appreciated assets. They are unique in allowing the family to maintain control over the assets and their allocation, providing a valuable way to pass on wealth while making a societal impact.
Benefits of a Family Foundation
- Tax Advantages: Foundations offer significant tax benefits. The assets you put into the foundation are tax-deductible in the year of contribution subject to limitations and carry-forward, reducing the donor’s taxable income. Furthermore, the foundation’s earnings are exempt from income tax, allowing more of your money to go toward the causes you care about. The donors can contribute long-term appreciated assets and get a charitable deduction while avoiding capital gains.
- Legacy Building: A Family Foundation can serve as a living legacy, allowing your family’s name and values to make a lasting impact on society.
- Family Involvement: Family foundations enable multiple generations to become involved in managing family wealth and philanthropic activities. This can foster family unity, impart essential financial management skills, and instill a strong sense of social responsibility in younger generations.
Considerations for Family Foundations
Setting up and managing a Family Foundation isn’t as simple as writing a check. There are essential considerations:
- Establishment and Operational Costs: Foundations come with setup costs and ongoing administrative expenses, which can be substantial.
- Involvement of Future Generations: Involving future generations while the current one is alive helps ensure a smooth transition. However, overly restricting their discretion might disengage them from wanting to manage the foundation.
- Succession Planning: Thoughtful planning about appointing and paying successor trustees is critical. Having a clear agreed-upon method for appointing successors ensures the smooth functioning of the foundation even after the primary donor’s demise.
- Changing Guidelines: Over time, the foundation’s focus may change. It’s crucial to avoid overly restrictive guidelines that may inhibit the foundation’s ability to adapt.
Remember, a Family Foundation is not for everyone. It’s generally considered a potential good fit when your family assets reach the seven-figure mark and above.
If you’re considering establishing a Family Foundation, professional guidance is vital to navigating these complexities. A Family Foundation can be an incredibly rewarding endeavor not just for the causes you support, but also for your family, fostering unity and purpose across generations.
If you are curious about establishing a Family Foundation, contact Friedman + Huey. We can help guide you down the right path for you and your family.
