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When Philanthropists' Children Fall Out – Lessons From The Paul Newman Story

Tom Burroughes

17 November 2022

Editor’s note: The following article is one of several we are running in coming days and weeks on philanthropy. Towards the end of the year, attention often turns to this subject, although of course philanthropy is important all year round. Falling markets, rising demands for help and the aftermath of the pandemic and economic dislocations are all likely to keep philanthropists busy. The Russian invasion of Ukraine and other geopolitical sources of strife also keep attention focused on this area.

(An earlier version of the following article appeared previously in Family Wealth Report, sister news service to this one.)

Philanthropy can often appear to be such a benign phenomenon that it’s easy to overlook how creating organisations for giving can spark family conflict down the line. And that means founders must work out how to minimise the problem.

In late August a story broke about how two daughters of the late Hollywood movie star, Paul Newman, had sued the Newman’s Own Foundation he had created, saying that its leaders have moved from the actor’s wishes and limited their involvement in its charitable giving. The charity was created in 2005, three years before the actor died. The non-profit controls a food company called Newman’s Own that funds the private foundation with its after-tax profits. 

“The Newman case demonstrates the need for a thoughtful approach in establishing a foundation’s objectives. First, the benefactor should identify a broad philanthropic mission that can be meaningfully applied through generations,” Joan Bozek, JD, director of trust services, , told Family Wealth Report in a recent interview. “Then, the benefactor should identify principles to be used in executing on the foundation’s mission. This two-step process can ensure a perpetual charitable purpose while also guiding the focus of the foundation.”

“Often the most difficult components of working with clients and family is to develop the purpose of a foundation,” she continued. “Developing that mission is a first step and often identified by the builder of the wealth but not shared by the rest of a family. It is essential to get the overall purpose of any foundation locked down. The mission needs to be curated to make it durable.”

As explained in an 23 August account in the Wall Street Journal, in 2020 Paul Newman’s foundation board of directors cut the yearly amount that Newman’s daughters each receive to direct charitable donations – from $400,000 to $200,000 – which they said violates their father’s wishes, according to the lawsuit. The suit was filed by Elinor “Nell” Newman and Susan Newman in a Connecticut state court. The lawsuit seeks $1.6 million in damages to be donated to the charities of the daughters’ choosing, along with a judgment that requires the foundation to abide by Newman’s wishes. The report said the daughters are not members of the foundation’s board of directors.

At a time when high net worth and ultra-high net worth families continue to create foundations and donate to them (see an example here), avoiding problems that could lead to costly litigation appears an obvious move. The issue is predicting what can happen years or decades after a founder dies. A related matter is when a benefactor passes over assets to an organisation for a stated purpose, and that body subsequently decides to vary what the money is spent on. This has happened with education or public policy-based charities, as in the case at the University of Chicago.

“The challenge is to state the purpose of a foundation so that directors/trustees have the ability to pivot as circumstances change,” Bozek said. 

“A well-structured foundation has a set of governing principles to support the mission; that is a critical component that sometimes can be overlooked,” Bozek continued. 

“What we want to do, for example, to nourish and transform the lives of children in adversity…those principles should then identify sub-categories of what that might include (education, financial needs, food and nutrition, play, etc). This helps future governors knowhow to determine the mission,” she said. “The industry has evolved to ensure there is less uncertainty and there is more sophistication in the industry.”

A radical step – the Patagonia case
One occasionally reads of super-wealthy business owners, actors, sportspersons and others saying they don’t intend to bequeath most of their assets to the next generation, preferring to endow specific causes instead. The signatories to the Giving Pledge, for example, have vowed to give the majority of their wealth to address some of society’s most pressing problems. The organisation started in the US but now includes philanthropists from around the world. Signatories include Bill Gates and Warren Buffett. There are 236 such pledgers as of the time of going to press. 

This decision to give most wealth to non-family members may be driven by idealism for causes; it may also be caused by a desire to avoid family conflict. The action of one successful business owner caused a stir in September: Yvon Chouinard, founder of US clothing and apparel company Patagonia, has given away the firm to a charitable trust that fights global warming. 

FWR asked Bozek about Chouinard’s actions.

“The Chouinard family’s transfer of Patagonia’s ownership and profits to a new, charitably-focused ownership structure is a unique example of aligning business and philanthropic passions. Chouinard built his business on helping us enjoy nature and his recent gifts will work to preserve nature’s beauty for generations,” Bozek said. “This is a unique situation, however. Few entrepreneurs have built businesses that align with their philanthropic passions.   

“To be clear, Patagonia will continue to function as a for-profit business. However, future profits will be paid to a private foundation that will help address climate change among other preservation efforts,” she said. 

FWR asked Bozek whether there are features of foundation laws in the US that create potential problems and whether reforms to the law might be useful?

"Periods of market volatility can create challenges for foundations. Endowments can drop in value, but distribution requirements under state and tax laws don’t specifically account for those fluctuations. Building in greater flexibility for foundations during challenging markets would be helpful,” Bozek added.