Is Forming a Private Family Foundation Right for You?

Financial Advisors Fully Focused on YouAt some point in the family lifecycle of wealth, the question invariably arises as to whether or not it makes sense to stop writing checks as individual family members or branches, and to form a Private Family Foundation in order to take a more formal approach to family philanthropy.

Here are a few considerations and alternative solutions:

The statistics on philanthropic giving in the United States are encouraging. According to the National Philanthropic Trust, while corporate giving remained stagnant in 2013, individual giving in the same year rose 4.4% since 2011, and amounted to over $335 billion, and 95% of high net worth households give to charity.

Charitable gifting strategies, such as Charitable Gift Annuities and Charitable Remainder and Lead Trusts, to name a few, are becoming more familiar to many high net worth families, so it stands to reason that the question of the Private Family Foundation is being raised more often.

Benefits of Forming a Family Foundation

A Family Foundation can be a great resource in teaching younger generations about the importance of giving back.

Even more compelling is crafting a family philanthropic mission statement that defines the types, locations and areas of focus that the family wants to support. This could include addressing issues that affect children, families, homelessness, domestic abuse and more.

Having a Private Family Foundation gives you time to decide where and when to make the investments that are appealing to the family, while gaining an income tax deduction in the year money is contributed to the foundation. Plus, it creates a family legacy.

A Private Family Foundation can be an effective estate-planning tool as well.

Assets placed inside the foundation are removed from the estate of the donor. However, they also become unavailable to heirs.

To remedy this situation, the family can take the next step and form a Legacy Trust as a potentially low-cost method of keeping the heirs whole while still gaining the estate tax benefit (more on this in a future article!).

Family members can also receive salaries for serving on the board of directors of the foundation.

Drawbacks of Forming a Family Foundation

So what’s not to like?

And why is it that, according to IRS statistics, there were only 115,000 Private Family Foundations in the United States as of 2008?

The primary answer is that establishing and running a Family Foundation can be expensive and time-consuming.

The Private Family Foundation is typically established as its own 501©3 entity with an independent EIN, which means there are legal and accounting costs. Starting a Private Family Foundation with anything less than $2-3 million is usually cost prohibitive.

Also, there are regulations that must be met, so record keeping is imperative. As an example, Private Family Foundations are required to donate 5% of their assets annually to qualifying organizations or face a punitive excise tax.

Self-dealing prohibitions place constraints on how gifts can be distributed. An affiliated member of the Foundation cannot use the funds from the Foundation to satisfy a multi-year commitment made by the individual.

Gifts made to a Private Family Foundation do not receive the same tax deduction as gifts made directly by an individual to a public charity. As a general rule, an individual donor can deduct up to 50% of their AGI (adjusted gross income) through charitable cash contributions, while a gift to a Private Family Foundation is limited to 30% of AGI.

Also, while gifts of appreciated property (we will limit this discussion to publicly traded stocks for simplicity) are deducted at fair market value when gifted to a public charity, cost basis is used as the deduction amount when the gift is to a Private Family Foundation, which usually results in a lower deduction.

Philanthropically driven individuals and families that like the control and legacy-building that a Private Family Foundation provides, but not the cost and administration, do have other options.

For example, donor advised funds have become popular in recent years to satisfy this demand. The main drawback to this solution is that gifts must typically be made in cash, as these funds generally do not accept appreciated assets. Do not confuse this with an Exchange Fund, which is specifically designed to accept concentrated stock positions, but which has nothing to do with philanthropy.

There are also a myriad of planned giving strategies, such as CRATs, CRUTs, Charitable Gift Annuities and CLT’s.

We hope we’ve helped you determine if a Private Family Foundation is the right choice for your family, as well as given you a few ideas of possible paths and their pros and cons.

If you’re philanthropically inclined and would like to take the next step by developing a strategic giving plan that aligns with your family legacy goals, give us a call at 443-692-8833 or email us at info@foundrywealth.com.

We would enjoy the opportunity to discuss your unique situation and, if you want to move forward, help you select and set up the solution that’s the best fit for you.