How to Start a Private Family Foundation
Writing a check is the easiest way to donate money, but is it really the best? Many philanthropists prefer to start their own private family foundation to support a cause meaningful to them.
Although starting a foundation may seem like a complex, daunting endeavor — and it can be — you may be surprised to learn that it’s often a feasible option for charitable people looking to make a more permanent change.
What Is a Private Foundation?
A private foundation is a nonprofit organization that’s committed to effecting change. Usually, the foundation is funded by an individual, a couple, or in this case, a family. To put it simply, private foundations are like charity events that never end; the organization is a vehicle that continues raising money to support its cause, often for many generations after it was originally founded.
Benefits of a Private Family Foundation
There are quite a few reasons why a family may want to start their own private foundation. Of course, the motivation varies widely depending on the people involved, but here are some of the most common reasons why an individual or family may want to start their own private foundation:
Support a Cause
A private family foundation provides opportunities for members to give tax-deductible grants to individuals or organizations they want to support. Donating as an individual isn’t as effective, as the person donating may be forced to pay income taxes on their donation. Donating through a private family foundation, however, the donor receives an income tax deduction up to 30% of their adjusted gross income.
Additionally, private foundations usually exist in perpetuity, providing an ongoing platform that generates money to support the cause.
Beyond receiving an income tax deduction, donors can donate assets to their private foundation to avoid paying capital gains taxes. Additionally, donations are excluded from the donor’s estate so they will not have to pay state or federal estate taxes. Resultantly, many high-net-worth families would prefer to see their assets benefiting the private family foundation, rather than going directly to the government.
A private family foundation gives children, teens, and young adults a vehicle to make the world a better place. Growing up in a household that supports charities builds character and helps the next generation to recognize the importance of philanthropy and the values associated with it. Establishing a foundation teaches social awareness and promotes personal fulfillment. It helps younger members of wealthy families to recognize the power and potential that having access to financial stability offers.
Leave a Legacy
Many families set up a private family foundation in honor of a loved one. Starting a foundation ties the family name to good deeds, so members of that family will be remembered positively long after they’re gone. It’s common for family foundations to be established shortly after a family member passes, often to support a cause that is near and dear to them.
Strengthen Family Bonds
Many family foundations are run by the family members themselves. This gives them a reason and opportunity to spend more time together beyond just meeting up for holidays. It also gives young adults who come from wealthy families a purpose and teaches them about money management, developing a strong work ethic, and other important ‘real-world’ skills.
Starting a Foundation
If your family is interested in starting a private foundation, there are professionals who can guide you on your journey. Our team can assist you every step of the way, ensuring that your charitable efforts are as effective and beneficial as possible — both now and in the future. Read on to learn the basics, and feel free to get in touch if you have any questions.
1. Choose a Cause
The first step to starting a foundation is deciding what cause you want to support. If you’re setting up a private family foundation in honor of a deceased family member or relative, you may want to select a charity that they were passionate about. Or, if they passed from a specific disease, for example, you could focus your foundation on fighting that disease.
Otherwise, you may choose to meet with your family to discuss issues that matter to the whole group. It’s important to choose a cause that everyone can get behind. Choosing a cause that has personal meaning to the whole family is one way to ensure that everyone involved stays engaged and excited.
2. Discuss Details
Before you embark on your journey, it’s important that you work out all the details. For example, is everyone able to contribute finances equally to the private family foundation? Are all family members able to contribute their time? What are your schedules like, and how much time can each member contribute?
Before you start getting into the serious details, you want to gauge what the foundation is going to look like a month, year, and even a decade down the line. While you can always adapt and make changes as you go, it’s important that everyone is on the same page right from the start.
3. Select Board Members
If you’re starting a private family foundation, you’ll probably want to appoint family members to be on the board. Of course, you can also seek outside assistance if you don’t have enough willing family participants. If you have family members who can’t commit full-time, you may be able to obtain grant certificates to provide limited granting rights to those who aren’t official board members. At SDA, our qualified financial advisors can serve as both an experienced board member and handle all finances for the organization.
4. Create a Name and Mission Statement
When starting a foundation, you’re not legally required to create a mission statement, but it helps to show the world what your foundation is all about. Naturally, when starting a private family foundation, it’s customary to include the family name (or an individual’s name).
It’s worth noting that the IRS does require that your incorporating documents include a statement that makes your charitable intent known, but you can always use a generic mission statement until you create your own. There’s no rush to create the perfect mission statement, but it’s certainly worth doing eventually.
5. Determine a Structure
You can establish your foundation as a nonprofit corporation or a charitable trust. There are pros and cons to both options. A charitable trust tends to be easier to start and run, however, the trustees may not receive as much legal protection. Many families prefer starting a foundation as a charitable trust in the early stages, as the process is much more streamlined.
On the other hand, starting a nonprofit corporation private family foundation reduces personal liability. It also allows more flexible use of your money. If you choose to establish your foundation as a corporation, you’ll need to go through the standard process of starting a corporation, including filing with the state government and IRS, hiring directors and officers, and writing articles of incorporation and bylaws.
6. Run the Foundation
Once you’ve jumped through all the legal hoops, and you’re ready to ‘open the doors’, so to speak, of your private foundation, your work is just beginning. It’s crucial that you run your foundation properly, avoiding common prohibited activities such as the following:
- Allowing too much money and/or assets to accrue
- Using the private family foundation for personal gains (such as paying the director an abnormally high salary)
- Using the foundation for political gain (such as making public statements or funding a candidate)
- Investing in ways that benefit exempt causes
- Failing to keep proper business records and file taxes properly
7. Seek Professional Assistance
We highly recommend that you contact an accountant/financial advisor right from the start. There are so many factors to consider and it’s imperative that you get started on the right foot. However, if you’ve already started your foundation, it’s never too late to seek guidance on running it properly.
After all, a private family foundation has enormous potential to make the world a better place, but starting a foundation can also cause irreversible damage to your family name and finances if you’re not careful. Even if you do your best to run your foundation properly, issues can arise that require an expert’s touch.
Contact Shahen Derderian & Associates
This is an exciting chapter of your life. You’re ready to make a big move, and that’s laudable. Our team is ready and able to help you start, monitor, and manage this thrilling endeavor — every step of the way. We’re trusted by many high-worth individuals and families, and we consistently deliver optimal results.
We encourage you to call so we can help you make your private family foundation a resounding success. Having the right team behind you makes a world of difference, so don’t wait — contact us today to get started.