Giving Back: Is a Family Foundation the Right Move for You?

If you have significant assets along with a strong desire to use that wealth in ways that can positively affect your community—or even society at large—you might consider starting a family foundation. This approach to charitable giving can be one way for families to engage in high-impact philanthropy.*

Family foundations are private foundations established and funded by affluent families to support causes they deem worthy. According to the Council on Foundations, family foundations typically have at least one family member serving as an officer or board member who plays a significant role in managing the foundation.

In our experience, however, there tend to be multiple family members involved. That’s because families often use these foundations to help foster family cohesiveness and instill values in younger generations.

Here’s a look at whether a family foundation could potentially be a good option for you and your family—either today or at some point down the road.

*Family foundations can be complex structures involving a range of tax and legal issues. We recommend consulting with a qualified professional.

Trends in family foundation usage

We’ve seen a growing interest in family foundations over the past decade or so, accompanied by the overall increase in affluence and net worth experienced by many Americans. Bigger picture, we have consistently seen that philanthropy is a top-five area of interest among the affluent. It makes sense, therefore, that interest in this type of charitable giving vehicle might rise along with wealth.

In one survey by the Family Office Association of 176 single-family office senior executives, a sizable majority of wealthy families—nearly seven out of ten—had already created family foundations (see Exhibit 2).

In addition, slightly more than half of the wealthy families who had not yet established a family foundation were actively considering setting one up in the future (see Exhibit 3).

Why the affluent like family foundations

The obvious question is: Why did so many of these affluent families choose to create family foundations, specifically? After all, there are multiple ways to engage in philanthropy.

Based on a statistical analysis by the Family Office Association of the factors motivating the wealthy to create family foundations, five major motivations were identified (see Exhibit 4).

Reason #1: Doing good

Nearly all of those surveyed explain that being charitable—in and of itself—is a key driver for establishing a family foundation. At its core, philanthropy is about doing good—so it’s not shocking to us that this is the top driver behind family foundations. The desire to do good is a necessary component of charitable giving, and a family foundation can be a very effective way to provide economic support to charities and causes deemed worthwhile.

Reason #2: Clear philanthropic vision

Highly correlated with wanting to do good is having a clear philanthropic vision. These wealthy families have very strong ideas about the causes and charities they want to support. The philanthropic vision can be diverse or highly focused. Moreover, the philanthropic vision can evolve and may adjust along with changing circumstances.

Reason #3: Control

A family foundation can give a family a high degree of control over their charitable giving, provided they adhere to the rules imposed on private foundations. A family foundation allows a family to make a wider array of grants (including pledge agreements as well as grants to specific individuals) than can be made through a charitable vehicle such as a donor-advised fund. A family foundation also gives a family significant control over how the assets in the foundation are managed.

Note that almost nine out of ten single-family office senior executives say that control was a major factor in deciding to set up and run a family foundation. This makes sense, as in our experience, affluent families who set up single-family offices value having control in many aspects of their lives.

Reason #4: Family impact

The vast majority of those surveyed see their family foundations’ charitable efforts as ways to reinforce family values and family cohesion. For example, we see that family foundations are often part of the education of current and future inheritors of a family’s wealth. The foundation helps them learn about managing money, vetting charitable organizations and giving sustainably, for example. When family members work together to donate money effectively, greater family unity can result. All in all, family foundations can be quite effective in bringing a family together around something they consider meaningful.

Nearly four out of five of the survey respondents with family foundations reported that the impact on their family was a major motivation to have a family foundation. And in another study of family foundations, The National Center for Family Philanthropy discovered that most family foundations actively engage next-generation leaders in one or more ways—such as providing their next-gen members with opportunities to formally participate in grant decision making (by having a formal next-gen board or by allowing next-gen family members to participate in grant decisions).

Reason #5: Forging a legacy

Some family foundations are high profile—even if their prominence is within a small circle such as a local community. Recognition is a factor for more than one-third of those surveyed. Additionally, some families create foundations to honor loved ones.

Note: Many of these reasons are interconnected to some extent. For example, having the family involved in making charitable decisions together can potentially help contribute to the family legacy and to the desire to have a vision for bringing good to the world.

Shifts in family foundation patterns

It’s worth noting that the dynamics seen among these five key motivators can, and do, change over time—meaning that families should build flexibility into their goals and the foundation itself. One study of 424 family foundations discovered that family foundations significantly shift their priorities as times change and new generations adopt leadership roles. For example:

• Sixty-five percent of the foundations kept supporting organizations near where their founders lived, a quarter-century after grantmaking began.
• Eventually, however, the foundations gave away less money in their founders’ communities—possibly because next-gen board members live somewhere else.
• Philanthropic priorities can also shift over time. High priorities for foundations in the 1950s, for example, included hospitals, literacy and care for older people. Today, family foundations are increasingly focusing on mental health issues, homelessness and inequality.

Reasons for not having a family foundation

What’s holding back the 30.7% of respondents without a family foundation? The major reason they gave for not setting up a foundation was a lack of a clear philanthropic vision—cited by 85.2% of those without a family foundation. There’s little to no agreement among these families as to what causes or charities they want to support. As such, they likely see no reason to set up a full-fledged foundation to achieve a nebulous (or even a nonexistent) goal.

The second most cited reason was the ongoing costs of running a family foundation. Such costs can be quite high. That said, cost was cited by a relatively small percentage of these respondents—just 13%. This suggests cost is not a major issue for these families.

Exploring your options

If you’re charitably inclined, want to have a big philanthropic impact and hope to involve your family in that effort, it may make sense to explore the option of a family foundation with a trusted advisor. There are numerous rules governing foundations, and it pays to get clarity on how foundations work and whether they are the appropriate type of giving vehicle for you and your family. Be sure to consult with a qualified tax or legal professional to help ensure that this is the right option and that you comply with current rules regarding family foundations.

The good news is that even if a family foundation isn’t a good fit, there are many formal charitable giving tools that can empower you to be philanthropic in strategic ways—including donor-advised funds and various types of charitable trusts.

The upshot: Explore your options if you want to make charitable giving an important, ongoing part of your life. Chances are, you can find a type of giving vehicle that fits your philanthropic goals, preferences and overall agenda.

Two types of family foundations

If you create a family foundation, you can choose to set it up as a nonoperating foundation or an operating foundation. The key difference: While nonoperating foundations make financial grants to existing charitable organizations that do the work, operating foundations directly run their own charitable programs that use their own staff and other resources.

Obviously, then, the model you choose will depend greatly on how active and hands-on you wish to be in your charitable efforts. The decision might also be driven by whether there are good existing organizations in place to address your area of philanthropic interest. In addition, nonoperating and operating foundations have differences in terms of rules to follow, spending and payout requirements, charitable tax deduction limits, and other factors. Any decision about which approach to take should be made in consultation with trusted financial advisors.

ACKNOWLEDGMENT: This report was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families, and is distributed with its permission. Copyright 2024 by AES Nation, LLC.