Insights for Your Journey

Should I set up a Family Foundation? Is this the right structure to help future generations of my family make a positive impact on the world?

If you’ve worked hard, been successful, and built significant wealth, you likely want to pass on opportunity and values to your loved ones, not just a comfortable life. You want future generations of your family to use your wealth to make an impact on the causes you care about, to carry your legacy beyond your lifetime.

But you face two challenges: taxes and structure. Taxes can eat away at your wealth and improper structure can leave a mess for your family, causing confusion and division.

The estate tax – a tax on your assets at death – can take a big bite out of your wealth. But with the right plan, you can reduce or eliminate these taxes, especially if you are focused on making significant gifts to charity. Tools like Donor Advised Funds are simple ways to set aside significant assets, eliminate taxes, and give to charities over time. We cover this in detail in How Charitable Giving Helps Reduce Taxes.

So, with multiple ways to solve the tax problem, why would you choose a Family Foundation over simpler solutions? Let’s start with a definition of Family Foundation.

 

What is a Family Foundation?

A family foundation is a type of private foundation set up by a family and funded with family assets. By meeting IRS guidelines for a private foundation, these organizations bring three tax benefits:

  • Reduce income taxes. Contributions are tax deductible up to 30% of your adjusted gross income, reducing your income tax bill today.
  • Reduce capital gain taxes. Assets grow free of capital gain taxes, eliminating taxes when assets are sold.
  • Reduce estate taxes. Assets are exempt from estate taxes, allowing you to pass more through future generations to causes you care about.

While these charitable organizations bring significant tax benefits, they also require ongoing effort.

 

How do I start a Family Foundation?

Starting a Family Foundation taxes some effort. The Council on Foundations lays out some helpful steps:

  1. Start with a mission statement. What unique impact do you want to make? Perhaps you’re focused on a big picture goal like accessible education or a more focused goal like providing resources and support to foster children and adoptive families. Whatever your goal, it should be specific enough to provide a north star for future generations.
  2. Establish an entity. With the help of a CPA, attorney, or other qualified professional, you’ll need to set up as a trust or corporation, then apply for tax-exempt status with the IRS.
  3. Create a board. Your board governs the foundation. A Family Foundation can name family members to the board or non-family members with specific expertise, as needed.
  4. Fund the foundation. Family Foundations can be funded with cash, public or private stock, real estate, and many other assets.
  5. Being grant-making. Once funded, your foundation must give away at least 5% of assets each year. Foundations should have and abide by a written governance plan that specifies a mission statement, process for making grants, who will participate in decision making, and how new goals can be added over time.

Family Foundations require regular maintenance, including annual tax filings, recording meetings, keeping detailed records of all transactions. So, how can you tell if a family foundation is right for you?

 

Is a Family Foundation right for me?

Despite the added effort required to maintain a Family Foundation, that they can be a great structure if:

  • You want to invest time and energy, not just money, in your charitable efforts. A Donor Advised Fund provides similar tax benefits in a simpler set up if you’re just looking for ways to give money, but a Family Foundation offers more hands on opportunity to get involved.
  • You want to create a structure to involve generations of family members. This can provide real-world training and career opportunities from investment management to foundation administration to grant-making, all focused on making the world a better place. Employed family members can receive a reasonable salary and benefits for their work all funded by the foundation.
  • You want to draw your family together around charitable efforts. As families spread out geographically, a Family Foundation can provide reunion points for generations or family. Many Family Foundations pay for annual retreats that include education and learning about investing, giving, budgeting, and supporting organizations you care about.
  • You want your efforts to last for generations. Family Foundations are intended to be a long-term effort with many lasting for hundreds of years. Future generations are likely to differ on desired impact and values, so it’s important to consider how the foundation could change over time and set appropriate boundaries to ensure your values are maintained. It’s even more important to demonstrate this in real time, showing family how to navigate differences of opinion or perspective during annual meetings.
  • You have enough charitably focused assets to justify the cost and effort. There’s no fixed minimum to start a Family Foundation, but we see this consideration starting when charitable assets approach $5 million or more. Below this, you may not have the resources needed to realize the benefits outlined above.

So, if you’re simply interested in passing wealth to charity over time and saving taxes, you might join increasing numbers of people turning to Donor Advised Funds. But if you want to utilize the foundation to employ family members, direct your investments, and have enough assets, creating your own Family Foundation can lead to a multi-generational legacy of giving.

Alterra Advisors - Josh Whelan

Craig Hamilton

Strategic Advisor

About the Author

With over 30 years of experience as a Certified Financial Planner, Craig Hamilton joins Alterra as a sort of paternal figure and has a position of respected “special counsel” to the firm. This role is likely familiar to Craig as one of his four children is also a financial advisor. Mr. Hamilton is also a Certified Public Accountant with a degree in Business from Pacific Lutheran University in Tacoma, where he graduated magna cum laude.

Craig was born and raised in the Pacific NW and built a family here that now includes seven grandchildren. In Craig’s words, “coaching, counseling, and mentoring are in my DNA.” This approach also characterized Craig’s financial career for 20-plus years as an Investment Officer for Russell Investment Services and their later incarnation as The Threshold Group. Throughout that time, Craig approached financial planning as “a critical tool to manage financial priorities and achieve a client’s dreams,” a philosophy perfectly aligned with the Alterra approach.

Craig took an early interest in all things financial — purchasing his first security while still in elementary school. Given his history, it’s not surprising multi-generation investing and legacy planning are his special interest. Listening to the stories of his clients and then helping them along the path to their goals brings Craig personal joy. So, it will likely come as no surprise that Craig was also a college tennis coach for over 20 years. To repeat Craig’s catchphrase, “coaching, counseling, and mentoring are assets” that he will invest in Alterra Advisors.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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