First and foremost, the reason to start a private foundation is to fulfill a philanthropic mission. Many foundation donors find they can make a significant impact in their chosen field of grantmaking, and many also find a high degree of personal fulfillment. That being said, let’s consider a few other issues.
A foundation is an institution. Granted, most of the 79,000 in the U.S. are small institutions, but nonetheless, they are legal entities that can exist separate from an individual. Foundations must operate within the guidelines of a few key federal and state laws, but generally foundations have a significant degree of independence.
So why establish a philanthropic institution? Why not just give money directly to a charity or set up an endowed fund within a nonprofit organization? These questions raise the issues of permanence and control.
Many foundations are set up with the notion that the endowment is to be permanent. Even small endowments, by providing persistent funding to a cause or charitable organization, can create tremendous public benefit over years. Permanent endowments can also honor and sustain a donor’s legacy, which, in turn, can inspire others in the same path - a living memorial, so to speak.
As for control, many families establish foundations as a way to engender an ethic of community-mindedness among family members and as a way to strengthen family ties by engaging relatives in a constructive, positive endeavor. Having complete control over the foundation helps create a sense of identity, and the foundation is free to operate without the oversight of an unrelated board of directors which is the case when using a donor-advised fund at a community foundation or charitable gift trust.
Before leaving the topics of permanence and control, let us note that not all foundations choose the path of permanence, choosing instead to focus intensely in the short term in hopes that solving a problem sooner will yield more societal benefit over the years. As for control, some donors are willing to give up some control (and pay fees) for the administrative services, legal protection, and a degree of anonymity that can be found with community foundations or charitable gift funds.
Is there a minimum recommended size?
For a simple, permanently-endowed foundation, many advisors think $500,000 seems to be a practical minimum. This estimate seems to be based on the assumption that the foundation will hire professionals, and if so, little income will be left over for grantmaking. However, this assumption is simplistic and does not reflect reality.
The experience of the Association of Small Foundations (ASF) is that many small foundations operate solely using volunteers. There are recurring administrative requirements in filing annual tax returns, but otherwise, a small foundation doesn’t generate much paperwork.
Also, don’t be fooled by just looking at asset size as a measure of a foundation’s potential. Some of the smallest foundations are pass-through vehicles for the donor. On average, ASF’s members under $500,000 in assets distribute about 15% of their assets, compared to the 5% typical of the largest foundations. Similarly, a small foundation may be essentially dormant, waiting to be fully funded upon fulfillment of a bequest or sale of an asset. Approximately a third of ASF’s member foundations expect additional donations or bequests. Finally, many foundations raise funds on an ongoing basis and consider that activity a core part of their mission.
If our foundation is small, what good is it?
There are many examples of small foundations leveraging their donations to significant impact. Most foundations donate in the towns or cities in which they were formed, and they are able to target their donations to grantees who have reputations for generating results. Small funders can also move quickly and spot overlooked opportunities. Many larger foundations look to local grantmakers to first identify future grantees.
Don’t forget about the power of permanence, applying subtle but consistent pressure over time to change an organization, an issue, or a community.
Even a small grant can focus the attention of a large organization to direct additional resources to a program. Think of the ability of a mosquito to make a large man move fast.
Finally, consider also the power of convening people around an issue. Your foundation may not have the financial heft required to fund an entire program to solve a social problem in your town, but your foundation might use its cache to convene other funders and social service agencies and thereby inspire collective action.
Is a foundation a way to limit my taxes and to pass wealth to my heirs?
Foundations make sense to fulfill a charitable impulse. As estate planning tools, there are much better options.
Family and friends of the donor may be employed by a foundation, even if they are board members or trustees. However, their skills and compensation must be reasonable and we feel should be commensurate with the charitable work of the foundation. Furthermore, the IRS and the public have a right to review a foundation’s grants and expenses to ensure compliance with laws that prohibit self-dealing and inappropriate use of foundation assets.
Is a foundation expensive to set up?
There are a few important things to take care of when setting up a foundation. If done correctly from the start, this early work will pay dividends in easing yearly upkeep. In addition, there are some basic, prudent practices to learn and follow related to “do’s and don’ts” of who may receive grants and compensation from the foundation.
We recommend securing the assistance of an attorney to help with the incorporation, bylaws and IRS filings, and obviously you should get expert help on tax planning and investing. Budgeting $2,000 to $5,000 for these services is typical. And, if none of your current advisors are good at understanding board dynamics or grantmaking regulations (especially decision-making and succession) get someone to advise you on how to select a board and establish rules for board service. (You might consider joining ASF to learn these issues. On a case by case basis, ASF staff can decide whether to admit a foundation that is in formation.)
Is a foundation complicated or expensive to operate?
You don’t need fancy stationery, an auditor, or staff to run a foundation. For operations, the boards of incorporated foundations must meet at least once per year, and many meet a just a few times around holidays (trusts may not even have to meet annually). Some foundations track their grants using a card file, others use a spreadsheet, and still others spend about $5,000 for administrative software. You’ll want to be able to track your investments with monthly or quarterly reporting, and if your grant volume is not that high and your investments are managed in one place, filing your own annual tax returns is not arduous. You are dealing with the IRS, and filing your annual taxes are required, so if this is not your cup of tea, then finding a good bookkeeper or CPA is advisable.
There are a few straightforward rules to follow regarding self-dealing and what you need to do to document grants you’ve made. With the proper operating habits in place, most foundation trustees find that they can focus on the fun parts of running the foundation - for instance, some enjoy grantmaking, others like the family dynamics of board meetings, and others enjoy managing the endowment.
What can’t a foundation do?
While the following list isn’t exhaustive, foundations face restrictions or prohibitions in the following areas: giving grants to staff, board members and their families; frivolous spending; direct lobbying; and making investments that are wasteful or imprudent. If your foundation was established as a trust, it can be difficult to change the foundation’s grantmaking focus or other conditions specified in the trust document.
Any surprising things a foundation can do?
Sometimes it is incorrectly assumed that foundations are forbidden to make grants to individuals, overseas organizations, and even businesses. In reality, these grants are all allowed, but there are additional requirements a foundation must follow when assessing and documenting the grant.
OK, I’m ready to go forward, what should I read?
For a simple, inexpensive overview of what it’s like to run a foundation, read The Foundation Guidebook. You can also order First Steps in Starting a Foundation by the Council on Foundations and Splendid Legacy: The Guide to Creating Your Family Foundation by the National Center for Family Philanthropy for an inspirational approach.
As for other Web tools, I’d start with The Professional Directory of Foundation Advisors where you’ll find a list of professionals who serve foundations, including a growing number of listings for many donor-advised funds and community foundations.
See also the Forum of Regional Association of Grantmakers to network with foundations in your community, and foundation Affinity Groups of the Council on Foundations where you can get inspiration from other grantmakers of similar interests to yours. Finally, Foundation Source and Fidelity Charitable Services now offer quick ways to start foundations as well as ease administration of them.