Giving Compass' Take:
- Erickson Braund, writing for Forbes, explores both the pros and cons of starting a family foundation and provides donors with alternative options.
- How should funders start to think about donor-advised funds as an effective funding vehicle?
- Learn how donor-advised funds are changing philanthropy.
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Through a family foundation, you can make a powerful impact on causes close to your heart and leave a charitable legacy to future generations. However, it’s important to understand the specific benefits and challenges to determine whether starting a family foundation is right for you.
By the end of the article, you should have a clearer idea of what a family foundation is, how it operates and the pros and cons to consider. Let’s dive in.
A family foundation is a type of private foundation that is established and funded by a family. People who choose to establish a family foundation often do so because it allows them to create a philanthropic legacy while receiving immediate and ongoing tax benefits.
You can fund family foundations with various assets, including cash, real estate, publicly traded securities and private equity. Family foundations are typically managed by members of the family or a professional foundation manager. Due to their cost and complexity, family foundations generally make sense only if you have $1 million or more to earmark for charitable purposes.
Pros Of Starting A Family Foundation
• Leaving a legacy: Starting a family foundation helps you make a bigger impact on the causes that matter most to you and offers a legacy of philanthropy to future generations.
• More control: Family foundations give you increased control and flexibility over your charitable giving. Donors have control over the foundation’s operations, ensuring that funds are directed toward causes aligned with their values and vision.
• Tax benefits: Family foundations come with several significant tax benefits. For example, you may be eligible to receive a tax deduction of up to 30% of adjusted gross income for cash contributions and up to 20% of adjusted gross income for long-term appreciated publicly traded securities.
Cons Of Starting A Family Foundation
• Cost: Establishing a family foundation requires a significant financial investment. Generally speaking, running a family foundation may cost between 2% and 5% of its assets annually. Achieving your full vision for the foundation may require an even larger financial commitment.
• Complex rules and regulations: Establishing and managing a family foundation requires adherence to complex, time-consuming rules and regulations. For example, a 1.39% excise tax may apply to the foundation’s net investment income if its annual investment income surpasses its deductible operating expenses.
• Minimum payout requirements: Family foundations must generally adhere to a 5% annual minimum distribution requirement to avoid a penalty of 30% of the shortfall. Your foundation has 12 months after the tax year in question to complete the minimum payout requirement.
Read the full article about family foundation by Erickson Braund at Forbes.