Philanthropy
One Size Does Not Fit All: Alternatives To The Family Foundation
Editor’s note: Here is a guest article by Meg Lassar, of Strategic Philanthropy, an organization based in Chicago. Family Wealth Report is delighted to share these insights and welcomes any reader reaction.
The many benefits of family philanthropy are well-documented. To name a few: it offers a context for teaching children about financial stewardship and giving back; it brings multiple generations together around shared values, and it preserves the founding generation’s legacy.
For these reasons and more, the family foundation is a popular option for grandparents and parents looking to establish a formal vehicle through which to conduct their charitable giving. In fact, the Foundation Center estimates that family foundations represent more than half of all independent foundations in the US. Similarly, family foundation giving constitutes over one-third (38 per cent) of foundation philanthropy in the UK according to the Centre for Charitable Giving and Philanthropy.
For many wealth and legal advisors, the family foundation is the default choice for clients who intend to involve multiple generations in their philanthropy. But the truth is that family foundations do not work for every family. Managing a successful foundation requires family members to put aside their personal differences, engage with one another in a professional context, respect each other’s varying social and political values and hold one another accountable to the foundation’s mission. For some families, taking on these roles can feel forced and uncomfortable. In these cases, giving together through a foundation may result in friction and conflict rather than unity.
As an advisor to wealthy families, you can help your clients to determine when and if a family foundation is an appropriate structure for facilitating their charitable goals. To do so, encourage your clients to reflect on the following questions:
- What do you hope to accomplish with your philanthropy?
- Are your charitable interests likely to evolve over the course of your lifetime? What are the chances that your charitable objectives (e.g. curing breast cancer, conserving land in a particular geographic region, etc.) will become obsolete one day?
- Will your children and grandchildren share your same interests and want to address them through philanthropy?
- How much of your wealth do you want to devote to philanthropy? (Interestingly, nearly half of family foundations in the US reported less than $50,000 in annual giving, and 62 per cent report less than $1 million in assets. When it comes to such modest amounts, a family needs to ask if it is really worth the expense and time to operate a foundation when other less costly and more manageable options may exist.)
- How much time do you and your family have to devote to charitable giving and how involved do family members want to be?
- What family dynamics might help or hinder the process of making charitable decisions with family members?
To understand these questions in context, consider the case of an elderly couple who wish to establish a foundation in order to pass down a family tradition of philanthropy to their grandchildren. Their young adult grandchildren, however, regard the perpetual foundation model as antiquated, preferring to use their family’s wealth immediately for projects in which they are personally involved. In this situation, an advisor might recommend that the family set up additional vehicles - such as donor-advised funds or charitable trusts - to complement the work of a family foundation. This hybrid model allows family members the best of both worlds. Through the foundation, grandparents and grandchildren can come together around a charitable mission that carries meaning for everyone. Then, they can use an agreed-upon portion of the foundation funds to support individual donor-advised funds that allow them to support organizations reflecting their personal interests.
Another idea is to limit the lifespan of the grandparents’ foundation so that, upon their death, the endowment splits into several foundations - one for each grandchild. This option ensures that future generations are not burdened with the responsibility of carrying out the wishes of their grandparents while encouraging them to address issues of their own choosing.
"Red flags"
In other situations, advisors should heed the red flags indicating that rather than feeling rewarded and fulfilled by giving together, family members will likely end up feeling frustrated and demoralized by attempting to run a foundation together. Consider the elderly patriarch who sets a charitable agenda without buy-in from his successors thus paving the way for possible resentment down the road, or the Baby Boomer-age siblings involved in a bitter business dispute who can’t be expected to make charitable decisions together. In cases like these, you can point clients to alternative vehicles that can help them give meaningfully either independently or with their families in a way that is less structured and onerous than managing a foundation.
For example, families struggling with communication and inter-personal relationship issues like the Boomer siblings and the dictatorial patriarch mentioned above, may be better served by establishing a designated fund at a community foundation in order to endow a specific charity of their choice - perhaps one that has personally touched their lives. This option is ideal for families with a strong tie to one organization or community but whose interests diverge when it comes to other issues.
Donor-advised funds are another attractive alternative. They are fast becoming the most prevalent vehicle for charitable giving in the US and are becoming increasingly popular in the UK as well. The lack of annual payout requirements and the immediate tax benefits allow for greater flexibility than do foundations in terms of giving and spending. Plus, they are cost-effective and easy to use.
Like family foundations, donor-advised funds offer an effective means of involving family members in giving without having to establish a formal governance structure. Some families may decide to set up separate donor-advised funds that children or grandchildren can use to distribute grants to organizations of their choosing. These funds allow for valuable learning around grantmaking, budgeting and working as a family. Other families invite next generation members to recommend one grant per year from their donor-advised fund (for example in honor of their birthday or graduation) to a charity of their choosing.
Decisions about whether or not to pursue family giving through a foundation can be made in the context of family meetings or retreats conducted by a professional facilitator - often a philanthropic advisor - who does not have a personal stake in the outcome. Such gatherings can reveal much about whether or not a family can realistically expect to successfully engaging in foundation work together. Family members’ willingness to participate in such a context may in itself reveal whether or not a family should pursue a collaborative fund.
By assessing families’ dynamics and encouraging them to reflect on their philanthropic goals, timeline, and resources before they set up a charitable vehicle, advisors demonstrate their ability to customize services in response to their clients’ specific needs. Further, advisors who take the time to understand the unique circumstances of each family they serve will inevitably save their clients considerable time, money, and stress. The process of giving as a family should be enriching and enjoyable and one that if facilitated correctly can reap rewards for both clients and advisors for generations to come.