Personal legacy planningBenefits of setting up a private family foundation

Seventy percent of wealth transfers fail from one generation to the next, with failure being defined as the involuntary loss of control over the assets.¹ Families who overcome this statistic have one key thing in common: Total family involvement. All work together at coordinating decisions around the family’s wealth. Most importantly, family members communicate well with one another and have trust in each other.

Finding a way to facilitate trust, communication and proper preparation and development of the necessary skill sets of the next generation can be difficult and will vary from family to family. Today, many families are finding answers to these questions through a private family foundation.

Here are potential benefits of setting up a family foundation, as well steps to take to help guide the setup.

4 potential benefits of setting up a family foundation

1. Solidifies the family’s core values

Having all members of your family actively involved in the foundation can help to strengthen values across generations.

Children learn values by watching what their parents do and doing it with them. Even kids as young as five or six years old can develop a philanthropic attitude. Find out what they care about and what they may have a passion for. It doesn’t matter what the interest is, simply that they begin exploring their interests and realizing that they can make a difference.

Working together will present opportunities for your family to support the passions of individual members and share in the satisfaction of the positive impacts achieved. This shared satisfaction can help increase your bonds of love and respect for each other and for the communities in which you serve.

2. Builds a legacy of service

You may have heard the often-quoted statement that “a family that works together stays together.” It also follows that “a family that plays together stays together” and “a family that serves together stays together.”

Working together in a family foundation can be a bit of all three: work, play and service. Family unity is often enhanced when parents, children, brothers and sisters, spouses and in-laws work together in charitable endeavors. Working and serving together may help build and strengthen relationship bonds. Additionally, as grandparents, parents, children and grandchildren work together in their foundation’s endeavors, a legacy of generosity is built for future generations.

3. Develops essential skills

Business skills such as communication, presentation and leadership can be developed and/or enhanced as your family discusses grant opportunities and listens as individual members present their case for their grant opportunity. Skills such as active listening and collaboration may also be enhanced by the lively discussions that tend to be a part of this process.

Investment acumen can increase as your family discusses appropriate investment opportunities for the foundation’s assets. Working with a professional investment advisor may create additional educational opportunities for your family, as advisors share their knowledge and expertise with the next generation of family philanthropists.

Foundations may also provide a sense of purpose and leadership responsibility for individuals who might otherwise feel that there’s no way to ‘out do’ their parents’ success and make their own mark on the world. Learning to run the foundation or take on a key leadership role gives them something that’s all their own. Responsibility and accountability can help individuals develop a greater sense of self-worth, pride and stewardship.

4. Grows trust and communication

You may want to ask your foundation’s board to employ a broad degree of leniency when approving grants recommended by family members. Doing so can increase the commitment of and strengthen trust among family members.

While the board should make sure that grants go to causes which embody your family’s core values and goals, allowing the senior generation to take complete control and only allow grants to their favorite causes may diminish individual family member commitment and ownership in the process.

Remember that actions speak louder than words. Supporting selected causes can have a greater impact than saying “pick a cause.” Open, honest, sincere and transparent communications and actions among your family will serve to build and strengthen trust.

5 steps to take in setting up a private family foundation

1. Develop a mission statement

Before you start down the decision-making road, consider developing a mission and vision statement for the foundation based on your family’s values, goals and vision for your wealth. These statements will provide continuing guidance for future decisions across generations.

Even young children can participate in the process. Their involvement will often enhance their commitment to the goals of the foundation. And if they later pursue a passion that’s based on a value expressed in the statements to which they contributed, their level of motivation is likely increased and the value more deeply imbedded.

You may find it helpful to use a professional facilitator in your mission and vision statement development. Using a trained facilitator to help you “discover” and articulate your core values can be fun and enlightening.

2. Take care of legal considerations

What type of entity would be best suited for your specific goals and objectives? What forms need to be filed? What governing documents need to be prepared?

Due to the technical nature of foundation establishment and operation you’ll most likely be working with various tax, legal and investment professionals. While legal and tax counsel are necessary, you may find that your current wealth management advisor has trained staff members with the necessary skill sets to help you expedite the process.

Remember to keep sight of your overall mission and vision as you make decisions.

3. Select board members

It’s important that future board members understand their roles and duties. Some of their responsibilities may include:

• Hiring and overseeing the foundation’s CEO
• Review and planning for potential liabilities
• Ensuring all legal obligations are met
• Protecting the foundation’s human, intellectual and financial capital
• Setting the mission and strategic direction of the foundation.

Under most state laws, a minimum of three board members is required, while some experts recommend a minimum of five board members. As you consider who to include, you may want to start with finding a strong and competent board Chair. The board Chair should be dedicated to the mission of the foundation and able to guide, support, encourage and lead the foundation internally and publicly in the community.

When selecting board members, strive to build a strong and engaged board. A foundation board needs members with impeccable reputations who are respected for their integrity and wisdom.

You may want to select board members from within your family to strengthen your sense of cohesion around a shared set of values and traditions. Also consider adding non-family members to bring additional expertise and diversity, as well as help mitigate any family tensions that may arise.

4. Assign day-to-day administration

Some of the daily administrative tasks of running a foundation include:

• Keep complete, current and accurate financial records
• Prepare financial statements
• File tax returns and conduct audit reviews required by law
• Receive applications for grants
• Write checks and pay bills
• Ensure appropriate liquidity between checking and investment accounts
• Prepare reports

It’s possible that many of these duties may be performed by members of your family if they have the necessary skill sets. In the right circumstances, these duties can provide an excellent environment conducive to an individual’s education and development. Still, many of these administration functions can be outsourced. It may be that a combination of outsourcing some of the functions and having family members provide others works best.

5. Manage and oversee investment selection

There are special legal and tax limitations and restrictions that apply to the investment of a foundations’ assets. One of the most important issues is whether a private foundation has invested in such a way that “jeopardizes” its ability to carry out its charitable purposes.

Because of the special privileges and purposes afforded a foundation, rules exist to protect the benefitted charities. A private foundation must meet the fiduciary standard of care to protect its assets. A fiduciary must always put the best interests of those for whom they serve first and foremost in all they do. Heightened scrutiny may be given especially to certain investment vehicles and strategies, such as: securities traded on margin; any trading in commodity futures; investments in working interests in oil and gas wells; the purchase of puts, call, and straddles; the purchase of warrants; and short sales, among others.

You may want to consider using some of the assets for values-based investing, with the goal of producing both financial and societal benefits. You’ll also need to determine how much, if any, should be allocated to alternative investments.

An investment professional can assist you in determining the best selection of investments for your foundation’s resources. Be sure to work with one that’s well versed in the intricacies of investing for a foundation. They can help you develop an investment policy statement and provide you with regular economic and performance updates.

Private foundations may not be the best choice for every family. However, even with the risks and complexities, they do offer some significant benefits for the charitably-inclined family.

Along with the potential tax advantages, a foundation can help unify your family behind service-oriented causes, while at the same time developing responsibility and leadership skill sets that will serve the family across generations.

Learn how Ascent can help guide your family legacy.

Impact investment funds are speculative and involve a high degree of risk. These investments involve a substantially more complicated set of investment strategies than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. There is no guarantee an investment in an impact investment fund will meet projected investment or income objectives. Always refer to a Fund’s most current offering documents for a more thorough discussion of risks and other specific characteristics associated with investing in private capital and impact investment funds.

Alternative investments very often use speculative investment and trading strategies. There is no guarantee that the investment program will be successful. Alternative investments are designed only for investors who are able to tolerate the full loss of an investment. These products are not suitable for every investor even if the investor does meet the financial requirements. It is important to consult with your investment professional to determine how these investments might fit your asset allocation, risk profile and tax situation.