Creating A Private Family Foundation


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It is natural for all of us to hang on to something that we have played a significant role in creating, developing, growing and managing. Family businesses certainly fall into this category. Many studies have shown it is difficult for the senior generation of a closely held family firm to relinquish ownership and control to a new and younger generation. There is no ideal way to transition a family business from one generation to another, but it does seem there are some common elements practiced by those firms that do it successfully. One of these common traits is that the senior generation member or members are able to create a meaningful second career for themselves. They are able to find a new challenge and pursue a new dream with plenty of passion.

This new challenge and new dream may take the form of being a social entrepreneur by creating and managing a private family foundation. You do not have to be a Carnegie or a Ford in order to create your own private foundation. In fact, statistics show that about 90 percent of the 30,000 to 40,000 grant-making organizations in the United States give away less than $100,000 each per year. When a successful family business owner reaches a certain point in life, after have learned his or her trade very well, the learning curve begins to level off and many times declines. Usually, this occurs after age 60, and it is during this time the business owner should be teaching others how to carry on the trade and be developing a stronger sense of stewardship outside the business.

A private foundation is a significant way for a successful family business owner to put a personal stamp on something outside the business. It also helps address significant estate tax issues and provides an opportunity to be productive during later years in life. The estate tax strategy alone, in creating a private family foundation, can help the family maintain control over assets that would otherwise end up in the hands of the tax man. The family foundation also provides an opportunity for many family members to participate in a family activity that may help develop some common ground between generations.

Like any activity worth pursuing, planning is important when considering creating a private family foundation. To get started, owners of a family business may want to take a portion of its profits each year and capitalize the foundation over a number of years. If it’s a $50,000 contribution each year for 10 years, the foundation would have well over $500,000 at the end of 10 years. Every family has close connections to certain charities, and the opportunities are limitless when it comes to being creative and entrepreneurial in charitable practices. Simply writing a check for a certain cause is generally not enough. Most successful social entrepreneurs want to have significant input in the organizations they are supporting—not to a point of minimizing the tremendous impact the full-time stewards of those organizations are having, but rather offering their own unique talents and gifts to help make the organization better.

Private family foundations can help promote the values of the family and the family business at the same time. Such foundations require a mission statement and a structure not entirely unlike the family business itself. The main challenges of the family foundation are spending money wisely, finding the best people to spend it on and engaging as many family members as possible to help be good stewards of the foundation. The foundation’s existence also gives the family business some incentive to make additional profits, so that some of it can flow back into the family foundation in order to do more good for others.

The idea of creating and managing a private family foundation can be energizing, fun, fulfilling and also very challenging. It can bring out all the entrepreneurial skills that one possesses and can provide an opportunity to rekindle one’s passion for creating and doing. Here are some basic thoughts on beginning to establish a foundation.

  1. Contributions into a private foundation are limited to a percentage of one’s income if given as cash versus appreciated property.
  2. Distributions made out of the foundation must be at least 5 percent of the assets each year.
  3. Administrative expenses must be reasonable and necessary.
  4. The foundation can contribute to any cause as long as it’s a charitable activity.
  5. A staff is usually not necessary, but the foundation can be managed by the benefactor and the family.
  6. There are some legal and accounting fees to initially set up the foundation, but they are not cost-prohibitive.

The experience, challenge and satisfaction of creating, building and managing a private family foundation can be equal to or greater than that of creating, building and managing a for-profit business. In fact, in most cases the satisfaction is much greater, because the end result focuses on helping others rather than benefiting ourselves. Most of us will be remembered in our life for what we did for others, not for how much money we were worth, what assets we accumulated or what our golf handicap was. Our real reason for being is to give to others as much as we can. We can help accomplish that through our own private family foundation and enjoy the last third of our life more than the first two thirds.

W. Kent Lutz is the director of the Goering Center For Family & Private Business at the University of Cincinnati. He can be reached at (513) 556-7185.