Posted on: November 1st, 2019
Many of the Super Rich—people with a net worth of $500 million or more—are often looking to use their wealth to create good in the world through philanthropy. What’s more, their wealth can potentially give them the ability to harness the power of private foundations—independent legal entities that typically give donors a high degree of control and organization over their charitable giving efforts.
But navigating the world of private foundations can be tricky. Even the Super Rich sometimes overlook important issues related to giving via a private foundation.
The good news: The following information can potentially help you with your own charitable giving plans and actions—even if you’re not at a private foundation level of wealth at the moment.
When wealthy individuals set up private foundations, they usually have a philanthropic agenda—commonly referred to as donor intent—in terms of which charitable causes the donors want their wealth to support. That donor intent can run the gamut from cancer research to an alma mater, from liberal organizations to conservative causes.
But over time, that donor intent can be lost—that is, the private foundation eventually stops committing money to the type of charitable causes that the donor would have wanted. Instead, the foundation starts supporting charitable causes that may be out of line with the donor’s wishes.
How can such an outcome happen? A key reason we see for divergence from donor intent is that sometimes donors fail to clearly set out their philanthropic principles. When a foundation’s creator dies, the money in the foundation can end up being allocated in unexpected ways that the founder never intended. The highly conservative business owners’ wealth might be donated through their foundations to liberal groups with goals that the entrepreneurs may not have agreed with.
Perhaps the easiest way to establish donor intent is for a private foundation creator to give while he or she is alive and in personal control of the foundation. The foundation can also be set up with a sunset provision to reduce the possibility that the contributions will go in an undesired direction down the road. A sunset provision is a specified time—perhaps in three or four generations—when the foundation will be required to give away all of its money.
That said, most people tend to want their foundations to be set up in perpetuity. In that case, here are two ways to help better ensure charitable intent is followed:
Let’s examine each option more closely.
To increase the probability that your philanthropic agenda will be maintained, you will likely need a mission statement.
It’s usually best if the mission statement is incorporated into the founding documents of a private foundation. Your mission statement serves to institutionalize your intentions so other people are explicitly aware of the charitable direction you set out, and can follow it. The better you are able to delineate your philanthropic agenda in your mission statement, the more likely it is that your private foundation will give your money away as you would have if you were still around to do so.
For example, it can prove very useful to communicate your mission statement to other people, including:
That said, it’s not always easy to construct a powerful mission statement. In fact, it can be a surprisingly time-consuming endeavor.
That’s partly because producing a high-quality mission statement is usually a learning process for many philanthropists as they conduct their giving over time. As they give more money to charitable causes and see the outcomes, donors commonly refine and further clarify their philanthropic agendas. In other words, one of the best ways to gain clarity on the rationale behind your giving is to use your private foundation and give regularly. As you become clear and precise about your charitable giving, you are better able to produce a well-thought-out mission statement.
It’s also very useful to make sure your mission statement is well written. You’ll want to avoid ambiguity and any confusing language that could be misinterpreted by others. Instead, spell everything out as exactly and completely as possible.
A mission statement might also include your reasons for establishing a private foundation as well as how your charitable giving is actualizing specific values and objectives that are important to you. Some philanthropists even provide supplemental material to help other people understand what they want to accomplish charitably. Examples of such materials include:
The upshot: The more you can effectively communicate what you expect your private foundation to do when you are no longer calling the shots, the more likely it is that your charitable agenda will be carried out.
Carefully selecting your trustees and support staff can also potentially increase the likelihood that your philanthropic wishes and preferences will be followed.
These individuals should be highly competent, of course. But they should also share your values and worldview. In many respects, you may be best served when you make your decisions based on character, philanthropic views and sense of commitment.
One way to evaluate the quality of trustees and staff is to work with them as you make grants from your private foundation. That can give you a front-row seat to see how they perform on the job. There are other advantages to this arrangement, too. For example, smart trustees may be able to help you refine and improve your philanthropic agenda.
You’ll also likely want to consider a method for setting up a board of directors and how future board members will succeed current board members. We have found that many wealthy philanthropists like to have age diversity on their boards, for example.
Clearly, making the right moves can potentially be very beneficial when dealing with a private foundation. That said, you can get value from this advice if you make charitable contributions through a trust or another vehicle (such as a donor advised fund).
Example: Regardless of how you give, it can be helpful to understand and communicate your charitable expectations and the principles behind them. That way, you remain clear on your own objectives—as do the important people in your life who might one day need to make decisions for you. In short, you don’t need hundreds of millions of dollars to have an effective mission statement about your philanthropic values and goals.
Likewise, selecting a trustee is an important concern if you gift via a charitable trust. Assigning oversight roles to capable and trustworthy people can potentially help you do a better job of turning your charitable vision into reality—and have a bigger impact. Contact your financial professional to discuss your possible charitable planning needs and how to best address them.
| Two types of private foundations Broadly speaking, there are two types of private foundations that you might consider: |
Non-operating foundations. These private foundations make grants to existing public charities to help fund those charities’ programs. In general, a non-operating foundation is required make an annual distribution of around 5 percent of its prior year’s average net investment assets.
Operating foundations. As the name implies, these private foundations operate their own charitable programs—that is, they engage in direct charitable activities rather than make grants to already established organizations. These foundations typically require more work, but some people and families prefer the high level of control they get by essentially being able to “run the show” themselves.
This report was prepared by, and is reprinted with permission from, VFO Inner Circle. AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.
Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures
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