More Family Owned Business Are Creating Own Foundations

June 5, 2002
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GRAND RAPIDS — According to Crowe Chizek & Co. LLP, nearly 90 percent of the nation’s foundations are operated by families and individuals.

In the firm’s latest Family Business Briefings, Walter Brown, a partner in Crowe Chizek’s Family and Owner Managed Business Group, wrote that about 42,000 of the country’s nearly 47,000 foundations are privately run, and establishing such foundations is becoming an increasingly popular idea for family-owned businesses that are interested in charitable planning.

“Effective estate planning has joined with swelling financial wealth to help prompt people to establish foundations,” wrote Brown. “Foundations also provide donors the ability to target their financial influence.”

Family control of a foundation also is seen as a better way over time to insure that one's bequest is spent for its originally intended purposes.

Data from the Foundation Center shows that the number of foundations nationwide grew by 114 percent from 1975 to 1998, while the assets of these foundations increased by nearly 12 times over that period.

The same source shows that six of every 10 foundations have less than $1 million in assets, while only 8 percent have $10 million or more.

Brown said there isn’t an exact set of circumstances that have to be followed by those thinking of establishing a foundation. But he did provide five considerations that should be a part of the decision for business owners wanting to do just that:

  • A desire to control and direct the grant-making process.

  • A level of personal involvement and interest.

  • An active interest from board members.

  • A current and planned asset size.

  • The costs of formation and administration.

The first three points are self-explanatory. But when it comes to the asset size of a foundation, things get a little trickier.

Brown said that, on average, a foundation should have a minimum of $500,000 in assets. A figure of that size is needed to justify the start-up costs, which generally run between $5,000 to $10,000.

“This general rule of thumb is also influenced by the potential asset size,” wrote Brown. “For example, there may be circumstances when it is advisable to establish a private foundation initially funded with a limited amount of assets, but where significant assets will eventually rest.

”A frequent application of this example is where a charitable remainder trust will eventually direct assets to a family’s private foundation,” he added.

In addition, Brown said that money invested into a foundation is usually deductible against ordinary taxable income.

If a foundation is part of estate planning, no tax is paid at death on the assets directed to the foundation. Administrative costs vary differently for each foundation, largely depending on who is in charge.

“Foundations should be operated as a business, irrespective of the asset size,” said Brown.

“Extremely active foundations will likely require an executive director who is hired to work with advisors, oversee grant requests and monitor financial results. The executive director will also insure administrative requirements, such as filing the annual tax return.”

By the way, a foundation must pay out at least 5 percent of its asset total each year.

More information is available by talking with an accountant or a financial or estate planner.

Founded in 1942, Crowe Chizek is a top 10 U.S. accounting and consulting firm with 1,400 professionals in a dozen offices.The local office is at 55 Campau NW in Grand Rapids.

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