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An option for managing a family-based legacy of giving.
A private family foundation is a type of private foundation set up by a family, funded with the family’s assets and often run by family members who can also participate in its charitable grantmaking. It can last as long as the family needs it to serve its philanthropic ambitions, and it can adapt as the family’s composition and charitable focus change.
A private family foundation is one way to create a framework for giving that can enable you to establish a philanthropic legacy. It can also provide income tax and estate tax benefits, though other types of charitable giving vehicles, such as donor-advised funds, may provide more.
There are no legal requirements specific to private family foundations—they are simply a type of private foundation governed and funded by family members and must meet all the same IRS guidelines for private foundations.
About 50 percent of private foundations in the U.S. are family foundations, according to the Council on Foundations. Family members will often serve as members of the foundation’s board, and will decide how the assets of the foundation can be used to meet the foundation mission—by making grants to charities or individuals. As with all private foundations, family foundations must disperse at least five percent of assets every year. A private family foundation’s grants are publicly viewable, which can make it easier for nonprofits and donors to learn what the foundation cares about and which causes and organizations it supports.
Funding a private family foundation: A private foundation can be established and funded on an ongoing basis with assets that can include cash, publicly traded securities, private stock, real estate or other family-controlled assets. The foundation can be managed by the family or by a professional manager, who may be known as an operating partner or a chief operations officer. A family governance system spells out who participates in philanthropic discussions, expectations for time commitments to the foundation, grant recommendation guidelines, instructions for adding goals and ways to educate family members about the mission as they become old enough to participate.
Setting up a private family foundation: As with any private foundation, set up and administration can be complex. You will need to consult a CPA or lawyer to set up the foundation, draft and file its articles of incorporation, mission statement and other documents, and obtain the foundation’s tax identification number from the IRS. A family foundation is also subject to all of the same ongoing administrative requirements as any other private foundation.
One popular alternative to a private family foundation is a donor-advised fund, such as a Giving Account at Fidelity Charitable, which can also provide a way for families to create a structure for giving, while offering greater tax benefits and lower administrative burden.
A donor-advised fund is like a charitable investment account used for the sole purpose of supporting charitable organizations you care about. It can bear your family name or any other name of your choosing. After making an irrevocable contribution, the donating family can make recommendations to the sponsor to make grants to any IRS-qualified public charity over time; there are no mandatory annual disbursements.
The charity sponsoring the donor-advised fund handles the fund’s management and all necessary recordkeeping. (At Fidelity Charitable, a web-based platform makes it easy for families to manage their giving and have visibility into their impact.) If your family wishes to remain anonymous in its giving, a donor-advised fund can provide that option as well—unlike a foundation where all grants are required to be reported publicly.
Additionally, for donors making a significant philanthropic commitment, some donor-advised fund sponsors provide additional support and services such as Fidelity Charitable’s Private Donor Group. Private Donor Group members have access to a dedicated philanthropic strategist who can help a family create a mission statement or implement a grantmaking strategy.
A donor-advised fund can also be more attractive than a private family foundation when you make the comparison because your charitable deductions are greater. With a donor-advised fund, your contribution is eligible for an immediate tax deduction in the current tax year. The deduction for contributing to a donor-advised fund can be up to 60 percent of adjusted gross income for cash and 30 percent of adjusted gross income for long-term publicly traded appreciated securities. That compares with a deduction limit of 30 percent and 20 percent, respectively, for a private foundation. There is also no tax on investment income when you use a donor-advised fund. Although private foundations are exempt from federal income tax, their investment income is subject to an excise tax of 1 to 2 percent.
It is increasingly common for families to transition an existing private foundation into a donor-advised fund with assistance from legal and tax advisors. A donor-advised fund can also be an option for those who wish to create a family-giving tradition, but may not have the assets needed to establish a private foundation. A donor-advised fund can be opened with a minimum of $5,000.
As you explore setting up your family foundation or other giving vehicle, it can be helpful to discuss these questions with your family or other experts:
One productive first step is to create a mission statement that focuses on the charitable sectors most important to your family. For example, older family members may wish to focus on the arts, while younger ones may be more attracted to social responsibility. Conduct a frank, open dialogue that addresses potential areas of conflict early on. A financial advisor, philanthropic advisor, or philanthropic strategist at a donor-advised fund may be able to help facilitate a productive family meeting to review some of these questions.
Learn more about strategies for effective family philanthropy.
Setting up an ongoing process for discussing issues around family giving is key, regardless of which method you choose to support your philanthropy. Families change through the addition of children, marriage and divorce, and death. As a family’s composition changes, so can its giving priorities and level of interest in a program of family philanthropy.
Now is an excellent time to begin your family’s philanthropic journey. Talk with your family members about your options and goals, and engage the experts you need to make those goals a reality.
Since 1991, we have been helping donors like you support their favorite charities in smarter ways. We can help you explore the different charitable vehicles available and explain how you can complement and maximize your current giving strategy with a donor-advised fund. Join nearly a quarter million donors who choose Fidelity Charitable to make their giving simple and more effective.
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