How to Start a Family Foundation

Starting a family foundation is a way to contribute meaningful amounts of money to charitable causes that are important to your family. It results in tax deductions and also helps the family to avoid some capital gains tax liabilities, but it involves transferring the control of the funds set aside in the foundation to a board of directors headed by a trustee. Many families start a foundation to engage the younger members in philanthropy. In all, there are more than 33,000 family foundations in the United States as of 2009 whose gifts to charitable nonprofit organizations amount to about 40 percent of all foundation grants.

Things You'll Need

• Financial adviser
• Funds available to set aside permanently for charity
• IRS Form 1023

Instructions

1. Choose the focus and giving priorities with which your family foundation will be concerned. Before setting up the actual foundation, your family should come to a consensus about the purpose for the funds that will be endowed or set aside in a trust fund. Everyone involved should understand that by starting a foundation, the family will lose some control of the funds in the foundation. Figure out which three to five relatives or trusted advisers will make up the family foundation's board of directors. You should also decide whether you will provide the sole support of the foundation or whether you will engage in fundraising activities. All of these decisions must be made before you apply for private foundation status from the Internal Revenue Service.

2. Consult a financial adviser about whether you should format your family foundation as a trust or a corporation. Your adviser will be able to tell you what your particular state laws require. Once you set aside money in a private foundation which is approved by the Internal Revenue Service, you must contribute to charity a minimum of 5 percent of the average net assets each fiscal year. The charities usually also must have Internal Revenue Service approval. In other words, they must be tax exempt 501(c)(3) nonprofit organizations which benefit the public good.

3. Apply for tax-exempt 501(c)(3) private foundation status from the Internal Revenue Service using IRS Form-1023. There is no actual distinction for a family foundation. The options are to start a private foundation which is a philanthropic organization, like the Bill and Melinda Gates Foundation, that funds the second option. That is to start a public foundation which is a nonprofit charitable service organization like the Red Cross or the Saint Louis Symphony. A family foundation is a type of private foundation.

4. Register with a foundation database like the Foundation Center or create a website to recruit prospective grantee organizations whose programs reflect your giving priorities. Many family foundations preselect the organizations which they fund. Others create competitive requests for proposals which they post online. Still other family foundations publish their giving priorities and consider proposals from eligible charitable service organizations. Often family foundations post a deadline after which they will accept no new proposals. Then, they consider the best proposals at annual, semiannual or quarterly board meetings.

Resources

• Read this Article in Spanish
• IRS.gov: About Foundations
• The Council on Foundations
• SaveWealth Estates: Private Family Foundations