Is a Family Foundation
For You?

Frequently Asked Questions:

How long does it take to set up a foundation?
Completing all the paperwork to establish a family foundation takes approximately six months. If created in the trust form, the legal entity is complete when the trust agreement is signed. If created in the nonprofit corporation form, the entity's articles of incorporation must be submitted to the appropriate state authority for approval and stamping. Depending on the state, the process varies from one day to three or four weeks. Once the creating document is complete, Form 1023 needs to be submitted to the appropriate IRS office to obtain Section 501(c)(3) status. On average, IRS review and approval takes six to nine months.

Is there a recommended minimum size?
The IRS estimates that there are at least 14,000 private foundations with assets of less than $100,000. Whether such a small foundation makes sense or not is another question to which there is no simple answer. Appropriate minimum size depends on several factors. These factors include:

How much volunteer help is available?
A number of issues arise here. Will a family member provide the legal assistance in establishing and operating the foundation? Will others volunteer to do the paperwork, answer the mail, write the checks, complete the tax return, submit estimated tax payments and serve on the governing board? The more volunteer and pro bono help available, the fewer staff required. But be sure to think through the long term. Will the same degree of volunteer help be there in ten years, 20 years or 50 years? The operating expenses will not go away.  

Will the foundation depend on ongoing lifetime gifts? The size of the annual budget is more important than the size of the endowment. If the donor or family members intend to contribute frequently to the foundation to fund the grant-making and other expenses, the size of the endowment is basically unimportant. This "pass-through" approach is not uncommon, particularly when the donor expects to endow the foundation with significant assets at death. 

How long will the foundation last?
If ongoing gifts are not likely and a significant bequest is not designed, a small foundation endowment of $100,000 or more may still be effective, as long as the intent is to operate the foundation for a limited number of years paying out principal as well as income. However, if the intent is for the foundation to be permanent, the amount of volunteer help available is minimal, and there are no ongoing contributions anticipated then what is a good rule for minimum size of the endowment? For a non staffed family foundation with volunteer board members, a suggested minimum size is $1 million.

The income from such an endowment should provide $50,000 to $55,000 for expenses and grants while still keeping the foundation's endowment even with inflation. Under this scenario, expenses should be in the $5,000 to $15,000 range, leaving most of the budget for grants. However, if the intent is to hire a full-time executive director, the annual costs of salary, benefits and office expenses are likely to reach the $80,000 to $100,000 range. In this case, a suggested minimum size is much closer to $10 million.

Donor Advised Fund Option
Donor Advised Funds vs. a Family Foundation
Want less work and higher deductibility limits?  A donor advised fund may be an option.  You can create a legacy that continues for generations and involves the whole family, but may be better suited for those with busy lives that have less complex goals.

This excellent Handbook from Foundation Source compares foundations and donor advised funds.

Family Foundation:  Getting Started 

Boardsource provides a reference guide in "Starting a Nonprofit Organization" 

About.com at Nonprofit Charitable Orgs provides information from startup through termination including managing volunteers. 

IRS Publication 4220 presents general guidelines for organizations that seek tax-exempt status under section 501(c) (3) of the IRC. Content includes references to the statute, Treasury regulations, other IRS publications that explain the requirements for tax-exempt status, and IRS forms with instructions.

The Life Cycle of a Private Foundation
During its existence, a private foundation has numerous interactions with the IRS - from filing an application for recognition of tax-exempt status, to required annual information returns and making changes in its mission and purpose. The IRS provides information, explanations, guides, forms, and publications on all of these subjects - they are available through the IRS Web site. 

RECOMMENDED READING


A Desktop Guide to Non-Profit Directors, Officers and Advisors, by Jack Siegel

"Jack Siegel--lawyer, accountant, management consultant, ---takes the putative director or officer of a nonprofit organization on a useful and often entertaining voyage throughout the realm of the tax-exempt organizations universe, pointing out its quirks, foibles, and legal liabilities along the way. His handbook will make mandatory--and arresting--reading for those who are already serving as trustees, directors, officers, and key employees of exempt organizations, particularly charitable ones. Siegel's goal, in which he succeeds, is to help directors and officers of nonprofit organizations 'make better decisions.' The book is full of large policy analysis and paragraphs on the details, such as board size, board committees, board meeting formats, the contents of minutes, and the duties of officers.