From the February 2009 issue of Wealth Manager Web • Subscribe!

Family Foundation or Donor-Advised Fund?

The economic downturn may have sowed second thoughts about charitable giving, but it certainly hasn't eliminated the philanthropic impulse. Indeed, those who have reached a certain level of personal and material success may view this tumultuous time as all the more reason to give back. And even in a cratering economy, there are those looking for the tax benefits that charitable giving can provide. But which giving mechanism is most suitable?

Of all the charitable giving vehicles that exist for donors to accomplish good works, the private foundation is widely considered to be the most effective, flexible and enduring. From the Rockefellers, Carnegies and Fords of previous generations to Bill Gates, Jeffrey Skoll and Gordon Moore of the present era, a defining mark of financial achievement is the ability to make a difference in people's lives through one's own private foundation.

Conventional wisdom held that a client needed $3 million to $5 million in expendable assets to consider a foundation. But clients don't have to be a Buffet or a Gates. The vast majority of all private foundations--nearly 70%--have assets of under $1 million. And, the cost of operating a modern foundation is now on a par with the cost of maintaining an equivalently sized donor-advised fund.

More than just a tax advantage

The financial benefits of a private foundation go far beyond the initial tax advantages. A private foundation serves myriad other purposes for high-net-worth families while at the same time, improving the lives of others. It exerts a unifying force similar to a family business by erecting a formal structure that links several generations working together toward a common philanthropic goal. By providing a reason to meet and converse, it is the glue that holds together family members who are geographically dispersed. It is the clear statement of purpose that transmits the family value system from generation to generation. And, if the foundation is set up in perpetuity, it becomes a time capsule preserving the memory and interests of the founders to generations of their family they may never meet.

A training ground for heirs

A family foundation also functions as a kind of training ground to prepare the next generation for the responsibilities of wealth. Many affluent parents are preoccupied with the impact of their fortune on their children. Involvement in a foundation sparks meaningful conversations about matters beyond "so what did you do today?" It can help offspring acquire some of the skills they will later need to land a job--including leadership, communications skills and reading financial statements.

Of course, the advantages of a private foundation don't solely benefit the family; society profits as well. Many advisors are unaware that private foundations provide donors with significantly more options than other modes of charitable giving. For example, other methods often limit donations to U.S. nonprofits. In a private foundation, donors can engage in international giving, set up their own scholarship program, and even provide funds to a for-profit business--as long as it is for a charitable purpose. In addition to making grants, they can make loans to nonprofits enabling the funds to circle back to the foundation for future giving. Moreover, families with foundations can provide funds directly to individuals who are experiencing an emergency, hardship or medical crisis.

Yet despite the varied benefits, advisors often resist recommending them because of the perceived difficulty of setting one up and managing it. While this may have been true at one time, today there are many options available to help families establish and run their foundations without the commitments of time and expense that were so often disincentives.

In recent years, advisors filled the gap by making donor-advised funds the default recommendation--especially for clients whose initial funding was less than $2 million. In the mid-1990s, many financial institutions launched a turn-key approach to donor-advised funds, marketing them as a new financial "product" and an attractive alternative to private foundations. Setting up a DAF became as simple as making a phone call.

For a private foundation, donors can nominate their own board members, establish their own organizational guidelines and bylaws, act as the final authority in investment and grant-making decisions, reimburse expenses related to their philanthropy and hire family members as staff to assist in pursuing their philanthropic mission--provided said family members are qualified and their compensation is reasonable and necessary. They also enjoy great flexibility in the types of assets they can donate to their foundation.

Emergence of service providers

Traditionally, the daunting work of assembling the entire team of advisors and staff necessary to keep the foundation running and in compliance was up to the donor. Now, companies have emerged that provide the same sort of turn-key services that were once only available with DAFs . Thanks to advanced technology and the outsourcing of services that automate and simplify the way private foundations operate, families can now set up a foundation in a matter of days and enjoy the control and flexibility that only a private foundation can offer without the traditional organizational complexities.

Professional foundation management companies such as Foundation Source have leveled the playing field by greatly reducing the administrative responsibilities and costs associated with private foundations. Now, philanthropically-minded families have real choice that doesn't hinge on cost or complexity.

Many donors start a foundation for around $250,000 and add assets over time--road testing their charitable interest and gauging family involvement before making a larger financial commitment.

For a fee, foundation administrators will shoulder the legal, accounting and compliance issues so that the donors can focus on the deeply satisfying part of their philanthropy--changing people's lives for the better. Typically, each foundation is
provided with a Web site, accessible remotely and securely from virtually anywhere. With a click of a mouse, donors can research charities, make grants and pay expenses, and keep tabs on compliance.

Running a family foundation can be one of life's most rewarding experiences. And with the advent of services that ease the administrative burdens historically associated with private foundations, financial advisors no longer need hesitate to recommend them to clients.

When clients experience the tax advantages, the family impact, the social benefits, the lasting legacy and now, the relative ease with which they can operate a family foundation, they will realize that the advisor was thinking about much more than just numbers.

Becoming a facilitator of family philanthropy can solidify the wealth manager's position as a trusted advisor to clients and their children, while offering an opportunity to manage their assets over successive generations.

Page Snow is Chief Philanthropic Officer at Foundation Source (, a Fairfield, Conn.-based firm that outsources the administrative services of more than 850 private foundations.

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