Your client family created a private foundation in the traditional way. At one point, your client sold a business, cashed in a really good investment or otherwise had some sort of unexpected windfall. Therefore, they decided (or maybe you advised and they agreed) that it would be a good idea to shelter some portion of the taxable proceeds, and that giving back to the community was also important to them. Some time may have passed since then, circumstances have changed, and now your client is wondering if there is any reason to continue with that private foundation.
There could be a number of reasons why a family might decide that their private foundation has outlived its usefulness. Finances could be a major one. The foundation could have been spent down through grant making or diminished by investment market losses during the economic downturn. Many of the experts that advise in this area will tell you that $3 to $5 million is necessary to justify establishing a private foundation, especially in light of the available options. The right number may not be that high, but the foundation does need to have enough money to make grants and cover its costs. Clearly, there is a point of diminishing returns. If the foundation’s assets fall below a certain level with no prospect of being replenished, the family may wish to consider another option.
Other changes in circumstances could bring the family to the same juncture. The kids grow up and move away, maybe they marry someone or favor charities the founding generation doesn’t like, or they adopt contrary political views. The founding generation doesn’t want to give up control or the kids already have too much on their plates to be philanthropists. Meaningful grant making is not easy, especially with limited resources, and there’s also an inescapable level of administration that goes with any private foundation. The family knows they can pay you, their professional advisor, to unburden them of much of this, but that may not appeal to them either. So just as there was a time when you suggested that they establish the private foundation and it was good advice, the time may come when you should suggest that, looking forward, there are alternatives to continuing with a private foundation that might serve them better.
So what are the alternatives? Assuming there’s no one in the family who wants to replenish the funds and take over grant making and administration, something is going to change. One option would be termination. The family could simply give away all the assets to qualified charities and wind up the foundation’s affairs. This process isn’t difficult, but there are federal and state requirements. It needs to be done correctly, so they would no doubt turn to you for help with that. The downside of termination is that thereafter philanthropic families will need to make their charitable contributions on a pay-as-you go basis, which can certainly have some opportunity cost for both them and their favorite charities.
There is another option that might appeal to philanthropic families, and that is the donor-advised fund. Their private foundation would simply grant all of its assets to a public charity that sponsors a donor-advised fund program like the Greater Miami Jewish Federation, and then wind up its affairs.
A donor-advised fund is a charitable giving vehicle offered by both nonprofits and for-profit financial service companies. It is a flexible, convenient, low-cost alternative to the private foundation, easily established with a simple agreement and an initial gift, which in this case would be the transfer from the private foundation. Donors initially decide how their fund is to be named and who is authorized to recommend grants. Thereafter they may contribute tax-deductible assets to their fund, advise the sponsoring charity on how the assets should be invested and recommend grants from the funds to charitable organizations of their choice. The sponsoring organization does all the record keeping and due diligence.
There are other features of donor-advised funds that make them the perfect successor charitable giving vehicle to your philanthropic client’s private foundation. Many sponsoring charities, including the Greater Miami Jewish Federation, have significant community planning resources in place to help your clients refine and fulfill their charitable objectives and evaluate the impact of their philanthropy. Most sponsoring charities, including The Foundation of the Greater Miami Jewish Federation, allow fund holders to manage their donor-advised funds securely online. Grants from donor advised funds and even the existence of the funds themselves may be anonymous, so unlike private foundations, the donor’s identity can be protected upon request. With no requirement of minimum annual distributions, donor advised funds can function as charitable savings accounts as well as charitable checking accounts. Donors can build a pool of social capital for a major project or for granting by subsequent generations. No meetings, corporate record keeping, taxes or tax returns are required and administrative charges are minimal.
The Foundation of the Greater Miami Jewish Federation is proud to be the charitable sponsor of one of Miami-Dade County’s largest donor-advised fund programs. For more information about transitioning private foundations, please contact Foundation Director Steve Lande by e-mail to firstname.lastname@example.org, by telephone at (786) 866-8623, or consult jewishmiami.org.
Steve Lande is Director of The Foundation of the Greater Miami Jewish Federation and serves as Federation’s Authorized House Counsel. Prior to joining the Greater Miami Jewish Federation, he directed the Jewish Federation of Greater Pittsburgh’s endowment program for 18 years. A native of Iowa, Lande earned a law degree from Drake University and practiced law in Des Moines before joining the professional staff of the Pittsburgh Jewish Federation.
South Florida Legal Guide Midyear 2015 Edition