by Cynthia Harrington
Private foundations allow donors to keep control and to make charitable giving a family venture. But, despite the fact that family foundations account for more than two-thirds of private foundations and one third of the grant-making in the United States each year, few advisors spend much time on them.
Cost and complexity keep most wealthy clients from setting up their own charitable foundations. Setup costs for legal and accounting services average $10,000 to $20,000. Each year, a foundation pays fees to file reports with the Internal Revenue Service, respond to inquiries for grants, assure that they meet the 5 percent annual gifting rate and abide by an ever-growing body of accounting rules. "Foundations can cause lots of aggravation for the donors," said Mitchell Freedman, CPA, PFS, MFAC Financial Advisors Inc., Sherman Oaks, Calif. "The enormous infrastructure of a private foundation makes it less useful for my clients who want to deposit millions not deca-millions."
The clear advantages of the private foundation are the ability to take a tax deduction in one year, yet be able to gift over time to charitable ventures. The larger the amount that is available to fund the private foundation, the more it makes sense. A commonly held minimum amount is $1 million. Over $10 million the private foundation is an easy choice. The larger foundations more easily support a formalized board and giving program in addition to the costs.
"Foundations of $10 million or more have to grant at least $500,000 each year," said Meloni Hallock, MBA, CPA, PFS, Ernst & Young, Los Angeles. "That’s a lot of money and a lot of work to grant it each year. Foundations with $1 million to $2 million are less formal. People have to consider they’ll be responding to solicitations for grants and have to decide whether they want to review them and send rejection letters."
For families in the middle of the $1 million to $10 million range, it’s a judgment call of whether it’s worth it. Hallock said that clients are apt to overcome the disadvantages of the private foundation for family reasons. "They want to get their children involved in making granting decisions," she reported. "The foundation has the ring of legacy about it. What they do with charitable actions during their lifetimes helps to mold and shape the values of the current and succeeding generations. Knowledge of the original donor is also passed on through the vehicle of the family foundation," Hallock said.
Another family issue that drives people to establish a foundation over other forms of giving is the desire to involve a child in a life’s work. One of Freedman’s clients chose the private foundation for just that reason. They felt that their son could work as the executive director of the foundation, through which he could draw a salary and contribute to the community.
Not all qualified donors overcome the disadvantages, though. Michael Joyce, MBA, CFA, CFP, Michael Joyce & Associates, Richmond, Va., has never set up a private foundation for a client despite numerous discussions about the advantages. "When rubber meets the road, most opt for the poor man’s foundation of donor-advised funds," he said.
Donor-advised funds allow some of the advantages of private foundations with no setup costs, minimal ongoing fees and vast grant-making capabilities. Donors guide the grant-making decisions but have less control over the ultimate recipient than with the private foundation.
"The donor-advised funds make more sense in several situations," said Joyce. "When the donor can’t define what their charitable intent is, can name a place but hasn’t defined how much, or find that their kids wouldn’t want to be involved, they are probably better off without the foundation."
Being clear about goals is at the core of the decision. These estate-planning vehicles are often irrevocable. "Once these are set up they can’t undo them," said Freedman. "I’ve got clients who gifted money into trusts and foundations when they were unhappy with their children. A few years later, things have changed and they wish they’d responded to their dissatisfaction in a different way. Forever is a long time."
Freedman told of another client that came in requesting a private foundation. A Las Vegas entertainer, he wanted to gift half of his merchandising revenues each year to children’s charities. The client’s professional manager saw the charitable foundation as a way to make a big PR splash for the entertainer.
When pressed, the client admitted that he didn’t want to have his actions made so public because it would invite too many requests. He chose to donate directly to personally selected charities.
Now, six years later, as a result of the terrorist attacks, revenues are down and he wants to interrupt the gifting for a time. "If he’d established the foundation and announced it to the world, he’d be creating negative attention," said Freedman.
Even direct gifting demands assistance. Charities have to be chosen each year and the gifts must be administered. Joyce recently marshaled the process of a client gift of $200,000 to a medical center. "We had to negotiate how the client would be recognized," said Joyce. "We helped decide where the acknowledgement plaque would be placed in the hallway, its size and the wording."
Traditional grant-making organizations offer help to advisors and trustees of private foundations. Some community foundations, like the Community Foundation of Silicon Valley, solicit private foundations to either roll the private foundation’s assets into CFSV or to use CFSV to administer the grants of the required 5 percent each year.
The Council on Foundations supports the Philanthropic Advisors Network where professionals helping clients with foundations can network and keep up to date on tax, legal and grant-making information.
A new company, Norwalk, Conn.-based Foundation Source offers Web-based foundation management and grant-making tools, tax filing and administration of daily tasks. Setup costs are significantly less at $2,750. Ongoing fees start at 1 percent for the first $250,000 to 0.25 percent for over $2 million.
The young company announced partnerships with TD Waterhouse and Bank One already this year. Both financial institutions will offer the Foundation Source product through their private client divisions. A similar relationship has been struck with CPA2Biz, the online portal of the American Institute of CPAs.
"We pull together all the necessary resources and offer a 72-hour turnaround on establishing a foundation," said Douglas K. Mellinger, the chairman and chief executive of Foundation Source. "We cost less, handle more and keep current on all the regulations. Now, people with as little as $200,000 can benefit from the control and flexibility of setting up their own private foundation."
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