Should You Start a Foundation?

Patricia O’Connell

Congratulations. You’ve done well. Perhaps you’ve sold a business; your stake in a company you helped fund or were a partner in has paid off handsomely; or you realize you’ve made more than enough money to take care of you and your family. You decide it’s time to give—and give back—in a big way. Is a private foundation the right choice?

Before you dismiss that option because you don’t have the $40-billion plus of The Bill and Melinda Gates Foundation (listed as the largest private foundation in the U.S., according to The Chronicle of Philanthropy), or you’re intimidated by the reach of the storied Rockefeller Foundation, which has worked for more than a century on global challenges related to health, food, energy, and economic mobility, think again.

Of the more than 91,000 private foundations that exist in the U.S., two-thirds have assets of less than $1 million, according to the Internal Revenue Service. According to Foundation Source, which provides support services for private foundations, the floor for starting a foundation is around $250,000. Certainly not small change, but not necessarily out of reach, either.

Such foundations—often referred to as private foundations or family foundations—are nonprofit charitable entities organized under Section 501(c)(3) of the IRS code, usually created by a single benefactor or a family. While foundations need to adhere to certain strictures, there is also a great deal of flexibility regarding oversight and day-to-day operations.

Larry Middleton, an executive vice president at Stephens Inc. who advises private foundations, notes that in many cases the individuals or families that establish foundations have some business acumen and experience, and therefore they operate like larger charities—or businesses. “We’ll draft an investment policy, a mission statement, set forth our objectives related to return, establish a risk profile, and I’ll provide guidance from an economic perspective to achieve their wishes,” he says.

That’s a level beyond the customary steps: drafting the guidelines regarding the targeted goals of the charities they’d like to support, what kind of economic support they intend to provide, and what will happen after the founder’s death to ensure that it continues to support the designated causes.

While private foundations must benefit charitable, education, religious, scientific, or literary purposes and generally give to other charitable organizations, they can also offer distinct benefits that the founders/donors wouldn’t realize with other forms of giving.

“I want to make sure that my money has a direct impact on causes and programs that are personally important to me,” says one individual who started his family foundation some 30 years ago to donate to arts- and education-related charities; mostly ones near his homes in Greenwich, CT, and Sarasota, FL. “It’s enormously satisfying seeing first-hand and up close what these organizations do.”

That kind of personal motivation is very common, according to Middleton. “The No. 1 reason people start foundations is mission-based,” he observes. “It is something you can do while you’re alive and have control over in terms of where the money goes to support causes and organizations you care about.”

It can also be a way to involve and educate family members. “It lets people teach their children and grandchildren critical life skills while supporting their values,” says Middleton. And because the foundation can theoretically survive long after a founder’s demise, it also allows people to have an impact that goes beyond their lifetime, leaving a legacy for survivors to nurture.

Of course, there are financial benefits to starting a foundation—but Middleton says that should never be the primary motivation. “Whenever someone tells me they want to start a foundation, I ask what their goal is,” he says. “If you are doing this purely for economic reasons, such as estate planning or for the tax deductions, it is the wrong platform. There are other ways to give money and get the benefits without the responsibilities that come with a foundation.”

Among those responsibilities are oversight, making donations/grants (foundations are each year required to give away 5% of the previous year’s assets), filing separate tax returns for the foundation, and the expense of running it.

Those were among the reasons that entrepreneur and author Mitchell Epstein chose not to start a foundation after he sold PrecisionLender, the software business he co-founded. “The biggest thing I believe is once we get to a certain level we have a responsibility to help others who are less fortunate, and my wife and I found ourselves at that stage after I sold my business,” he recounts in his autobiography, Mr. Lucky: My Unexpected Journey to Success. “There are several local foundations [in Sarasota] that support the causes we feel strongly about. Giving to those through a donor-advised-fund (DAF) allows us to do the same things as we could have done with our own foundation without the associated expense and oversight responsibility.”

In contrast to a private foundation, where the donor retains control over the giving, with a DAF, contributors make irrevocable contributions to a nonprofit organization that administers the fund and makes decisions regarding investments and grants. Contributors may recommend eligible and preferred charities for grants, but the fund’s governing body is free to accept or reject any recommendation.

Another consideration regarding foundations is that the information on them is publicly available, meaning donors can find themselves inundated with requests for grants. “We have a client whose accountant listed her home address as the foundation’s address, and as a result, her mailbox is stuffed,” says Middleton. She spends a lot of time and energy on the superfluous requests, and it has robbed her of some of the joy of being a philanthropist. “She tells me, ‘I want to support things that I care about. And now I feel bad because I say no so often,’” recounts Middleton.

He points out that on the other hand, a foundation can serve as a buffer against personal requests. “Saying ‘We’ve established a foundation and review requests quarterly’ takes people out of the frontline when they’re approached about donations.”

For those who want to have more control and involvement and are in a financial position to be generous during their lifetimes, establishing a foundation can be a way to get back more than they give.

In addition to supporting public charities and other types of nonprofits organizations, a foundation can:

  • Make grants to individuals for disaster relief and economic hardship
  • Provide loans that are repaid to the foundation
  • Set up scholarship and award programs, and choose the recipients
  • Grant directly to international organizations
  • Provide funds to for-profit companies, as long as they’re used for a charitable purpose
  • Run its own charitable programs, such as a coat drive or soup kitchen

Among the assets that can be held in a private foundation are cash and publicly traded securities; alternative assets, such as private equity; real estate; tangible assets (including art, jewelry, collectibles); intangible personal property (copyrights, patents, royalties); annuities and life .