When most people hear the word Foundation they immediately think of families such as Ford, Rockefeller and Carnegie. However, more than 60% of foundations have less than $1 million in assets. With the number of foundations doubling between 1990 and 2005, it is reasonable to assume that families with assets significantly less than that of the Carnegie�s are forming the majority of new foundations.
The two general types of foundations are either private or public. The primary distinction is that private foundations generally receive donations from a single source while a public foundation receives donations from multiple sources. A popular form of a private foundation is a family foundation where a family member will contribute assets to the family foundation and can then be managed by their heirs long after they are gone. The subsequent family members who manage the foundation can also receive compensation for their efforts.
The family foundation makes sense when a family is charitably inclined and has a strong motive to give. One of the many benefits is that forming a family foundation will encourage your family members to communicate, if for no other reason, about how and to whom distributions should be given. Typically, the foundation will distribute a specified percentage of the assets; say 5%, each year. If the assets grow on average 8% annually, the excess 3% remains in the foundation and results in a larger pool of assets going forward. On average, the pool of assets from which distributions will be 3% larger each year resulting in a larger pool of assets that can be used to benefit charitable causes for generations to come.
An initial deterrent for many families from establishing a family foundation is that the assets will not be available to leave to their heirs upon their death. The solution to this potential problem is simply to buy enough life insurance that can be distributed to your heirs upon your passing. Many times, the tax benefits more than offset the value of assets contributed to the foundation resulting in your heirs actually receiving more, while at the same time contributing a sum of money to the foundation. In other words, one plus one does equal three � sometimes. Another deterrent is the perceived cost of establishing a foundation. Historically, significant costs have meant that it was not cost-effective to form a foundation unless you had millions of dollars to contribute. However, companies have formed in recent years that provide turnkey services for individuals interested in forming family foundations that are relatively inexpensive. The result is that foundations are now being formed with as little as $100,000.
If you can leave the same amount of money to your heirs and, at the same time, contribute money to a foundation that can be used to benefit society for future generations, is this not worth considering? Consider your charitable interests, family interests and personal tax situation. For many of you, a family foundation is excellent opportunity to positively impact the world long after you are gone.
Please feel free to contact me if you would like to discuss whether a family foundation makes sense for you.