So Your Clients Want a Private Foundation

This article is part of the Professional Advisor Insights series.

“How much money is necessary to make it economical to set up my own foundation?”

This is often the first question the advisor gets from a client considering significant philanthropy through his or her own entity. I can guarantee it won’t be the last.

But this first question is the absolutely worst first question to ask.

Clients who have created wealth through their lifetime work, especially those with successful businesses who have been involved in philanthropic endeavors as donors or volunteers, often consider how they can control their philanthropy. Carrying out their own personal views on philanthropy and causes they espouse are strong motivators.

The Advisor’s Role

The role of the advisor in getting to an answer that works for the client is to ignore this question at the outset and ask critically important questions that will lead to creating a successful foundation or one that will be a burden, fail in its operations, and terminate.

• Do you remember how long it took and how much effort you expended in creating your business? Starting a foundation is starting a new business. And one you likely know nothing about. Are you ready for that? Will you make a serious time commitment for its success?
• Are you willing to learn about the state laws governing nonprofit entities? The federal tax laws and regulations governing their operations? The required filings of both levels of government? The penalties for doing things wrong even if inadvertent?
• Will you do all the work yourself, such as accounting, investments, grant application reviews, site visits and much more, or will you hire staff and have employees all over again? (Especially true for clients who sold a business or are retiring.)
• Are you prepared to budget for legal fees, CPA fees, investment management fees, delivery of program fees, taxes (yes, there are taxes) and other expenses every year?
• Most importantly, why do you want to do this? What is really important to you and your family?

There are many advantages to a private foundation, especially family control that can last for generations. The emotional rewards of making grants that impact the lives of others are almost tangible. The control over investments and the ability to make grants directly to individuals, if such program is approved for exemption, can be very gratifying.

But are there other ways to achieve similar results?

The Donor Advised Fund

Simplicity is the key word with donor advised funds.

If the client does not want to bear the burdens and cost of creating a private foundation, the advisor should insist that he or she look into the possibility of creating a donor advised fund; it may completely meet the needs and philanthropic desires of the client.

• The fund is owned and controlled by the host organization; it’s not a separate legal entity. All the “heavy lifting” of its operation is borne by the host charity, with minimal cost to the donor.
• The donor can retain advisory capacity over grants to be made on a yearly basis, from income or from principal of the fund.
• The tax deductibility level is higher.
• The host charity provides grant making support services.
• The donor does not have to learn or be subject to all the tax and regulatory rules, while enjoying all the benefits of philanthropy.

The San Diego Foundation offers advisors and their clients many options with donor advised funds from anonymity to full recognition and terms to meet the donor’s needs.

Learn More About Donor Advised Funds

About Lynda Sands, JD, MBA

Lynda Sands, JD, MBA, has advised nonprofits, families and businesses in high-net worth philanthropic planning and the creation of private foundations and new public charities for 40 years. As attorney, advisor, lecturer and author, she has trained tens of thousands of financial advisors across the country and several generations of major and planned gift officers.

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