(Crain’s Chicago Business, 25 January 2010)
Starting a private charitable foundation when you inherit a small fortune, sell a business or take your company public is one way to minimize taxes while doing good. Although the recession has made such windfalls less common, entrepreneurs are still finding reasons to get into the giving game.
Attorney Denis Pierce, 65, an owner of Pierce & Associates P.C. in Chicago, planned to start a family foundation two years ago with money from the sale of his interest in the law firm. When the sale fell through, he launched the foundation anyway, but with less funding.
The Pierce Family Charitable Foundation, which helps non-profits working on housing issues, started in December 2007 with $1 million. Thanks to Mr. Pierce, it now has about $3 million in assets and provides technological, fundraising and bookkeeping assistance to 10 organizations and gives operating funds to 10 more. “I’m moving into semi-retirement mode, and it gives me a whole other area to think about,” he says.
Interested in hanging out your own foundation shingle? Proceed cautiously. “A common misconception is that a family foundation is just like a checkbook,” says Melissa Berman, president of Rockefeller Philanthropy Advisors in New York, a non-profit that advises private clients and foundations. “In actuality, you’ve started a non-profit company, and you have to file a tax return and make sure your financials are in order.”
Foundations are required to donate at least 5% of their assets a year, and their investment earnings may be subject to excise tax. For these reasons, many experts suggest that starting with less than $1 million in assets is not worth it, unless you’re planning on pumping in significantly more money.
“Why would you want to start a new corporate entity and go through all of that math to give away less than $50,000 a year?” Ms. Berman says.
To run a foundation properly, you need plenty of legal and philanthropic advice. Laws governing non-profits are not always obvious, like the rules against self-dealing, which prohibit cousin Fred from renting his office space to the family foundation at a discount, even if it saves the foundation money.
Also, notes Valerie Lies, CEO of Donors Forum of Chicago, “people don’t understand how difficult it is to give money away thoughtfully. It requires a fair amount of due diligence. For any issue, there are hundreds of non-profits.”
The options for managing a foundation include hiring staff; dividing tasks among family members; paying a community foundation, bank or adviser to take care of administrative details, or opting for some combination of the three. All can be effective, but if grants account for less than 65% of annual expenses, your administrative costs are too high.
Philanthropists often start foundations with expectations that giving as a group will promote family unity. But that doesn’t happen without planning, especially in families not particularly harmonious to start with.
One way to avoid conflict is to find a focus agreeable to all family members, like protecting the environment, before writing the first check, even if that means giving up long-held plans to support stem-cell research (it upsets sister Linda) or scholarships to Notre Dame (one son-in-law went to Michigan).
It’s also essential to define who has the power in the venture. “If dad established the foundation, is it the adult children’s role to support dad?” says Virginia Esposito, president of the National Center for Family Philanthropy in Washington, D.C. “Well, sometimes dad’s hoping that other people will take a lot of the initiative.”
“The best way to do a good job is to have trustees who can give the work the time it takes,” Ms. Espo-sito says. Be honest about how much time each person can devote. Let offspring with children or demanding careers step away if they must.
“Say to your daughter who’s an intern at a hospital, ‘We understand you don’t have time now, and we’ll welcome you back later,’ ” Ms. Esposito says. “It’s much better than making her feel she’s letting the family down because she can’t come to board meetings.”
©2010 by Crain Communications Inc.
Read this article at Crain’s Chicago Business.