Give It Up

As Americans pile up wealth, the family foundation

Illustration By Christophe Vorlet

Philanthropy is a growth business. High-tech plutocrats, media moguls, and other new economy merchant princes are establishing private foundations at a rapid pace. The number of foundations has more than doubled since 1980, and close to three-fifths of America's larger foundations were created over the past two decades. But not just new economy billionaires are setting up foundations. Many people have accumulated more wealth than they ever imagined when they left home or college and began their work lives. Now, they want to make a difference with their money.

"We are in an area where a number of people have hit it big with stock options," says Gregg Clarke, partner at Willow Creek Financial Services in Sebastopol, California. "They have their core portfolio taken care of, their long-term needs taken care of, and they want to give back to the community."

For advisors looking to help their clients plan their estates and pursue charitable goals, a foundation is an excellent way to share wealth. It's not the only alternative, of course. Many Americans--especially those with less than seven-figure estates--opt for charitable remainder or lead trusts, donor-advised community foundations, or donor-advised charitable gift funds offered by major mutual fund companies like Fidelity and Vanguard. These vehicles are simpler to set up than a foundation. Indeed, purely from a tax standpoint, foundations can also be less advantageous when compared with other charitable methods. For example, founders are limited to a deduction of 30% of adjusted gross income on cash donations to a private foundation, versus 50% on gifts to public charities. Deductions on gifts of appreciated stock to private foundations are limited to 20% of adjusted gross income.

Still, a foundation offers advantages that many wealthy families find irresistible. In essence, a foundation lets your clients exercise a great deal of control over investments, donations, and management. Most important, a foundation allows parents to actively involve children and future generations in philanthropy. "There is the important notion of continuing a family legacy of giving," says Jonathan Guyton, a certified principal at White Oak Wealth Advisors in Minneapolis. Adds Ross Levin, a certified financial planner and president of Accredited Investors Inc. in Edina, Minnesota: "The biggest reason to set up a foundation is for the culture of giving to permeate the whole family."

Foundations are complex legal entities and expensive to set up and run. For instance, investment income generated by the foundation's assets can be hit with a 1% to 2% federal excise tax, although most foundations pay about 1%. Annual maintenance fees may run about 2% to 3% of the endowment. Federal law requires a foundation to give away, on average, 5% of the endowment assets' market value every year, or face a tax penalty. Little wonder careful planning and drafting are crucial to establishing a foundation. "It's a very specialized area," says Carl Mehl, owner of Medallion Financial Group in San Jose, California. "It's desirable to have a team of experts to work with."

PHILANTHROPY ON THE WEB American Institute of Philanthropy, a well-respected industry watchdog. Council on Foundations offers information on setting up a foundation. Foundation Center is a cyberspace portal to the world of private foundations and corporate giving programs. Site publishes tax returns of nonprofits. National Charities Information Bureau is dedicated to promote informed giving. An outreach program to encourage giving by wealthy young adults. National Center for Family Philanthropy encourages family giving. Founded by money manager Claude Rosenberg, it focuses on increasing charitable giving among the wealthy. The Forum of Regional Associations of Grantmakers is a leading source of info about philanthropic giving and grant making. Helps foundations with little or no staff. Women's Philanthropy Institute promotes giving and community activism among women.

Mehl notes that one alternative to a foundation is a supporting organization, which is a public charity dedicated to supporting other nonprofits. While it is complex to set up and run, a supporting organization isn't bound by the more restrictive rules and regulations of a private foundation. Rules for tax deductions on contributions are also more generous.

Like private foundations, supporting organizations allow for family involvement and limited control over investment assets. But one significant drawback is that a supporting organization must name specific charities that it will back when it is established. It's extremely difficult to change beneficiaries. One way to broaden choices is to add a donor-advised fund as one of the charities. You can designate grants from that organization.

Critical to running a successful foundation is a clear grasp of the institution's mission. What causes will the foundation support? What is its geographic scope? It may take several years for a family to hone in and refine its mission. Networking with other foundations and nonprofit organizations is also critical. "No matter how large it is, the foundation has to be focused," says Albert Bellas, a managing director at Offitbank, the Wachovia Corporation private banking unit in New York. "It usually takes several years to achieve focus."

A foundation's investment policy is tightly linked to its philanthropic goals. For instance, some wealthy founders are determined that their foundation will exhaust its resources during their lifetime. That goal may dictate a vastly different investment approach than the more typical foundation strategy of existing for perpetuity. Similarly, families need to figure out how much the foundation will pay out in grants every year. While federal law mandates no less than 5%, a growing number of foundations are comfortable with more aggressive goals, such as 6% to 8%. And remember that there are administrative, investment, and other expenses. A perpetual foundation that has decided on a 5% payout, a 3% annual inflation rate, 1% for expenses, and 1% for investment management fees would have to set an annual target rate of return of at least 10%.

At Medallion Financial, Mehl designs a well-diversified core portfolio comprising 80% of total assets for the foundations he works with. The money is usually invested in mutual funds for smaller foundations and in managed accounts for the larger ones. He'll also invest up to 20% in alternative investments--such as venture capital, real estate, and emerging markets--for larger foundations. Gregg Clarke of Willow Creek Financial likes to see money invested in five different major asset classes. Since new economy entrepreneurs are founding many of the new foundations, some 15% to 25% of the portfolio might be in illiquid investments like venture capital.

  • It's good for society, your clients, and your business.
  • It helps clients looking for ways to give back to society, memorialize a loved one, or simply do good.
  • It expands the menu of services available to your clients, thereby increasing their level of satisfaction with you and your services.
  • It adds to your areas of expertise as a professional advisor.
  • It increases the potential for new client referrals.
  • It marries your chosen profession with your desire to do something good for the world.
  • It helps address important social needs and helps make your community a healthier, more vibrant place to live.
  • It puts you in touch with a supportive network of new colleagues willing to share their time and expertise.

Source: Regional Associations of Grantmakers

Still, any foundation should set aside a certain amount of cash or short-term fixed income securities for liquidity. Much like the typical retiree, a rule of thumb is that a foundation will want to have one to two years' worth of spending immediately available. "That way, a downturn in the stock market would not affect your giving activities," says Guyton.

Foundation governance issues are vital. Family members can be on the board or work for the foundation. But there are strict conflict of interest rules and prohibitions against self-dealing. For instance, an entrepreneur can't set up a foundation and then have his private company rent out space to the nonprofit or demand that it buy supplies from his company. Still, these are the kinds of situations outside advisors are well equipped to handle. "It's best before anything is dispersed to have safeguards in place to ensure compliance with statutory rules and conflicts of interest," says Bellas.

Far more difficult to deal with are governance conflicts between the generations. Remember, family foundations are usually set up to pass along the founder's philanthropic values. The older generation that made the fortune or inherited it first tends to dominate the institution and run it with its desires and convenience in mind. But members of the younger generation, perhaps in their 20's and 30's, have many more pressures on their time. Tracy Gary, head of the Women's Fund Community Consulting

Services/Changemakers in Ross, California, recommends families work with facilitators to help decide on priorities and run efficient meetings. She also suggests the next generation form its own bonds by setting up its own committee and meeting separately. "Families need to consider their role in mentoring the next generation and transition and leadership succession planning," she says.

Clear procedures also need to be in place to give money away. Only 5% of foundations have a professional staff, and many foundations find themselves overwhelmed at the end of the year as they struggle to meet their donation targets. But many organizations will help foundations get a better handle on grants, such as the Regional Associations of Grantmakers (see Web table, page 58). Family members should also consider getting involved with organizations that get their money. For instance, Scott Oki, former head of global sales and marketing at Microsoft Corporation and now head of the Oki Foundation in Seattle, volunteers at all the organizations that receive aid from his foundation.

In helping your clients establish foundations and review possible targets for donations, you should, by all means, turn to the Internet. The Web offers a growing array of resources for private foundations (see Web table, page 58), ranging from the Council on Foundations' site ( that reviews the basics, to the Donors Forum of Chicago (, that features a searchable database of more than 40,000 grants worth some $900 million.

Once a foundation is up and running, it's a good idea for foundation members to regularly revisit their charitable giving. For one thing, a periodic checkup motivates them to judge the effectiveness of their giving. Did the school or homeless shelter the foundation's funded get built? Are there better ways to leverage grants? Would the family's money have a bigger impact if it went elsewhere? These can be hardheaded questions, but the answers are critical for a foundation to make a difference.

Foundations and other forms of charitable giving are remarkably complex. The legal, regulatory, governance, management, and monitoring issues are difficult. Bill Gates, who along with his wife, Melinda, established the world's largest foundation with $22 billion in assets, may well have been right when he remarked that it is easier to make money than to give it away.

Yet no matter how Byzantine the finances of benevolent giving may be today, the simple, underlying insight of Alexis de Tocqueville, the peripatetic 19th century social philosopher, still resonates. "Americans of all ages, all stations of life, and all types of disposition are forever forming associations. There are not only commercial and industrial associations in which all take part, but others of a thousand different types." For those who want to share their newfound wealth, sharing it via a private foundation is a truly moving expression of community.

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