Darnell hadn’t expected to accumulate the wealth that he did over the course of his lifetime. He hadn’t been a huge wage earner. Darnell had just worked steadily all his life, while avoiding borrowing, paying cash for everything, living modestly, saving religiously, and investing wisely. Investing may have been Darnell’s gift. While his savings had been significant, over the long term his investing had doubled, tripled, and then quadrupled and more his savings, until he was wealthy beyond his dreams. Except that Darnell had never really dreamed of wealth. He would rather give it all away. And that realization was when he began thinking about a foundation. 

Definition

A foundation is a charitable entity that has raised its substantial funding from a single individual, family, or corporation, and does not provide charitable service but instead supports other charities financially. A foundation is a funding source for other charities. A foundation is, in a practical sense, a large pile of money waiting for its distribution to charities providing services. If you have substantial wealth to give for charitable causes, so substantial that you need an orderly way for distributing it over time to qualified charities, then a foundation may be for you. A foundation can last as long as its funding lasts, which may be in perpetuity if the foundation’s intent is to preserve principal and spend earnings. Your foundation can certainly outlast you, continuing your legacy of giving long after you’ve passed. During your lifetime, your private foundation can also give you a rewarding ministry of giving through which to promote and enhance your legacy.

Identity

When you form a foundation, you choose its name. The name of your foundation can contribute to your legacy. You may name your foundation using your full name, your last name, your name and your spouse’s name, or another family name meaningful to you and connected with your heritage and identity. How you identify your foundation may enhance your legacy. You can also choose a name associated with the cause your foundation will pursue, the locale or population you wish to serve, the goal you wish to achieve, or the attribute you wish to enhance. Don’t hesitate to make your foundation reflect your commitments, values, identity, and aspirations. Develop your foundation’s story, account, theme, image, and other marks, signifiers, and symbols to reflect your deepest aspirations. Your foundation may then greatly enhance your legacy. 

Funding

Private foundations have no minimum funding floors. You can start your private foundation with as little funding or as much funding as you have or wish to devote to it. Yet the administrative costs of establishing and maintaining a foundation, and less-expensive alternatives that may accomplish most or all of your charitable goals, make a funding floor good sense. Generally, you shouldn’t be thinking about a foundation unless you have at least $1 million to $2 million to devote to it, apart from your own assets and any bequests you intend your estate to make after you pass. Your foundation funding, in other words, must be excess monies you can dedicate to the foundation, not funds that you may need for your own support or may wish to convey to family members for their support or inheritance after you pass. If you have less than $1 million, such as $500,000, but expect to make additional contributions to your foundation exceeding $1 million, then you may wish to embark on your foundation plan on that expectation. 

Alternatives

An individual or family foundation can be an exciting enhancement to your charitable legacy. Yet the time, trouble, and funds a private foundation can require in setup and administration may discourage you from pursuing it, especially if you find a suitable and more-efficient alternative. Community foundations can make good substitutes for a private foundation. Your community foundation likely enables you to set up a private fund under your name or your family’s name, out of which to make grants according to your articulated mission. You may not have the same extent of involvement or control over your community foundation fund as you would have with your own private foundation. But the cost savings and convenience may be well worth it. You may alternatively find a private foundation or endowment already established in which you can participate or with which you can partner to support your charitable cause. Private schools and other charitable and religious organizations often have their own endowments to which they invite contributions and bequests. Explore alternatives if your foundation funding is limited or a foundation carries too great a cost in time, trouble, expense, and administration.

Organization

Although you may determine your foundation’s mission and focus when setting it up, your foundation is a separate legal entity from yourself. You may form your foundation either as a trust or nonprofit corporation. A trust can be easier to establish and require less reporting but be less flexible and may require probate court involvement to direct and modify. A nonprofit corporation with loyal, skilled, discerning, and trusted board members whom you appoint may be your preferred form. You may include yourself and family members on your foundation board. Your board will adopt bylaws to govern the foundation’s operation, providing for things like officers, meetings, mission, finances, reporting, and indemnity. With the assistance of counsel, your foundation would obtain a tax identification number and apply with the IRS for recognition as a tax-exempt private charitable foundation. Your foundation would then stand on its own as a legal entity qualified to administer your foundation funds, enhancing your charitable legacy.

Mission

Foundations aren’t just a money source. They can also have missions. The tax code requires you to restrict your foundation to a charitable, religious, educational, scientific, literary, or safety-testing mission. You may, if you wish, leave your foundation’s mission that broad. But you may also focus your foundation’s mission on your favorite charitable cause. By their missions, foundations determine what charities to fund. Some foundations focus on education, others on social services, others on access to medical care or improving medical care, and still others on addressing poverty. You name the charitable cause, and you may find a foundation that provides funding for charities that address it. Charitable organizations solicit their own donations. But charities also search high and low for foundations willing to make grants to support the charity’s programs and operations. Indeed, charities align their missions specifically to attract funding from foundations that have the same mission. Consider what mission your foundation would serve, whether broad or narrow.

Administration

Foundations require some administration, especially to comply with tax laws. While a foundation’s board governs the foundation, foundations typically have an executive director responsible for carrying out the board’s directives in pursuit of the foundation’s mission. You may serve as your foundation’s volunteer executive director, appoint or retain a family member to do so, or retain a paid executive director. Your foundation’s executive director will ensure that the foundation manages and invests its funds prudently, and solicits, evaluates, and makes grants, while working closely with a lawyer or accountant to ensure compliance with tax regulations. If these sorts of administrative activities don’t dissuade you from your dream of a private foundation, then investigate the option further. Taking on foundation work after you retire from your lifelong career can make for an exciting and rewarding retirement career. Involving your family members in your foundation’s work can be equally satisfying and enhance your legacy further.

Grants

Your foundation funds charitable service organizations through grants. Foundations are generally grant-making organizations to 501(c)(3) charitable organizations operating programs. Foundations may publicly solicit grant applications or may instead maintain private funding relationships with specific charitable organizations. Your foundation, though, must generally make enough grants annually to meet the tax code’s payout requirements. Your foundation cannot simply sit on its monies, allowing them to accumulate with the tax code’s advantages, while making no payouts in the form of grants for charitable services. The general payout requirement is five percent of the foundation’s assets. With prudent investing of foundation assets, a five-percent payout generally enables the foundation to preserve and even grow its principal. Your foundation could preserve its funding and even see its funding grow, to enhance your legacy with grants paid out for a very long time.

Regulation

When Congress granted foundations favored tax status, it simultaneously adopted laws and authorized IRS regulations to prohibit foundations from abusing the privileged status. The favored tax status is to promote charitable activities, not to increase family wealth. Your foundation is not, for instance, a slush fund for high living by your family members and friends. To maintain its tax advantages, your foundation must meet IRS requirements that, among other things, prohibit excess benefits from flowing to any individual such as a family member. Your foundation could pay a reasonable salary to your family member for administrative services such as grant review. But your foundation must not pay an excessive salary to a family member or other individual for no work or for minimal work far less than the salary implies. Annual reporting requirements ensure that the IRS has enough information to evaluate compliance and penalize non-compliance. See the close regulation of your foundation not as an annoyance but instead as a way of protecting your commitment to charity and securing your charitable legacy. 

Representation

A private foundation generally requires skilled representation from a qualified lawyer to organize the foundation. Your foundation will then require skilled accounting services to meet annual reporting requirements. Locate qualified professionals through referral from other professionals you have retained for other legal and accounting work, local and state professional associations offering referral services, friends and acquaintances employing professionals for similar services, and other word of mouth. Interview candidates to ensure their fit. Confirm service pricing and billing terms to be sure that you understand the cost. Ask for references and check those references. You may alternatively find a reputable entity that provides full services for foundation administration, especially if your foundation is on the smaller side with limited funds to cover administrative costs.

Reflection

Do you have the substantial assets to consider forming a family foundation? Do you expect to earn and accumulate more assets that you could contribute toward a family foundation, without interfering with the legacy that you expect to leave to your children or other family members? Would a family foundation enable you and your family to support a charitable cause or interest over a longer period of time? Do you or does a family member of yours have the time, interest, and skill to administer a foundation? Do you have a charitable interest or cause in mind that your family foundation would serve? 

Key Points

• A foundation is a grant organization with a single funding source.

• You may form your own private foundation with substantial funds.

• Your private foundation may bear your name or other personal identity.

• A community foundation fund with your name may be an alternative.

• Your private foundation would be a trust or nonprofit corporation.

• Your private foundation may have a broad or narrow mission.

• Private foundations can require substantial financial reporting.

• Private foundations have a five-percent annual payout requirement.

• Tax laws closely regulate private foundations to prohibit excess benefit.

• Retain a qualified lawyer and accountant or equivalent service.

Read Chapter 12.