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Considerations for Establishing a Family Foundation

Posted by Michelle Johnson on Nov 16, 2020 7:45:00 AM

After achieving success and financial security for your family and future generations, you now want to shift your focus to making the world a better place.

If you would like to donate a part of your assets to charitable endeavors, what is the most appropriate vehicle for you and your family to execute your vision? One option is to establish a family foundation. Here are some variables that you should consider before deciding whether to move forward.

Background: What Is a Family Foundation?

The IRS defines a private foundation as an organization meeting the qualifications of a tax-exempt entity under Section 501(c)(3) of the Internal Revenue Code. More simply, private foundations are typically established by a small group of people, such as a single family or business, and are generally funded using these parties' investable assets. One of the primary motivations of a private foundation is to provide charitable grants to entities that align with the private foundation’s purpose.

Advantages of a Family Foundation

Increased Control over Donation Decisions

Establishing a foundation allows you and your family to have greater control over investment and donation decisions. Family foundations enjoy the opportunity to allow greater than 50% of board members to be family members, which is prohibited with public charitable organizations.

Charitable Tax Deductions

You may receive a tax deduction of 30% of contributions made to your family foundation. You are eligible for this deduction regardless of when the funds are donated to the final beneficiary.

Capital Gains Tax Benefit

Investable assets donated to a private foundation are not required to be sold prior to transfer to the foundation. This means that you are not required to pay capital gains at the time of transfer, and the assets can continue to grow for the benefit of the charitable beneficiaries.

Reduction in Estate Tax

Because the assets will now be the property of the private foundation, rather than your personal estate, you may be able to reduce the amount of estate tax you may owe.

Drawbacks of a Family Foundation

Setup Considerations and Operating Costs

There is a significant amount of time and money involved to ensure that your entity is established correctly. You will need to work to ensure that your family foundation's function meets the requirements of a 501(c)(3) organization. It is beneficial to consult with accounting professionals, lawyers, and/or investment professionals to ensure a smooth operation. Learn more.

Ongoing Regulatory Compliance

A family foundation will have ongoing regulatory compliance obligations, such as annual tax returns (Form 990) and donor documentation, among others. You will want to ensure that the benefits of running a family foundation do not become overshadowed by the cost of operations.

Other Considerations

Some other questions you may want to consider include:

  • How long would you like your foundation to continue?
  • What are the charitable goals of your foundation?

Once you establish your family foundation, it is generally considered to operate in perpetuity. Consider what the transition will look like when making adjustments to the family’s charitable vision.

These are just a few of the parameters you should consider when exploring whether a family foundation is appropriate for you and your family.

Do you have questions about establishing a family foundation or other issues regarding the management of your family office? We would be happy to discuss your strategy with you. Contact Michelle Johnson, Partner at Goldin Peiser & Peiser at 214-635-2601.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Family Office, Estate Tax, Family Foundation, Charitable Tax Deductions