Family Foundations Have Advantages

April 6, 2007
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GRAND RAPIDS — From the J. Spencer Barnes Memorial Foundation to the Irving and Birdella White Foundation and dozens in between, charity-minded people in Grand Rapids have discovered you don't have to own a soap company to have a foundation.

According to The Foundation Center's Web site, 31,347 family foundations gave away $12.6 billion in the U.S. in 2004. Although there's no legal definition for family foundations, The Foundation Center estimates that about half of the nation's foundations are considered to be family foundations.

"There's a couple of advantages," said Nancy Sabolish, a CPA, certified financial planner and partner at Beene Garter in Grand Rapids

"One is control. If it's a private foundation, the family gets to control — within the IRS limitations — who donations go to and when. Versus other types of charitable vehicles, the private foundation offers the highest degree of flexibility and control to the donor. And it's a way for them to create a long-term, multigenerational legacy."

Income tax deductions are an attractive benefit of charitable giving at many income levels, and setting up a family foundation to accept those donations is no exception. However, Sabolish noted, deductions for cash donations to a private foundation are limited to 30 percent of adjusted gross income; 50 percent for public foundations.

"It could be a really good strategy if an individual had a very high income year and wanted to save some income taxes and didn't want to give the money away right away, but wanted to do it over time," Sabolish added. "You could give it to the foundation and distribute it over time."

"Another tax savings strategy is gifts of appreciated stock or other investments. You avoid the capital gains tax by donating appreciated assets into the foundation," she said.

However, family foundations require an attorney and a CPA to create the foundation, file paperwork with the IRS for tax-exempt status and file annually with the IRS. Plus, those filings make public information out of the foundation's assets, income and donations.

Also, the family foundation generally is required to distribute 5 percent of the value of assets each year.

Foundations also carry self-dealing restrictions, so that the person setting up the foundation may not buy, sell or lease anything from or to the foundation, and the foundation can't be used for personal or family needs, Sabolish said.

While there's no minimum investment required to establish a family foundation, Sabolish said it takes at least $500,000 to make it worthwhile in the face of all the set-up and maintenance costs.

Sabolish said other strategies are annual gifts to favorite charities and donor-directed funds. Other options, such as a charitable remainder trust, are used more for estate planning rather than annual giving, she said.

At the Grand Rapids Community Foundation, donor-directed funds are touted as an alternative to a private foundation.

"Donors establish a fund through which they can accomplish their charitable giving without all the administrative hassle of a private foundation," said Marilyn Zack, vice president of development.

"You get all the tax benefits of a charitable gift to a public charity, but you don't have to deal with the reporting and expense of a private fund."

Such funds can be set up through many foundations and brokerage houses, Zack said. In the case of the Grand Rapids Community Foundation, the gift is made to the foundation.

"We put it into our pool of assets and invest it," Zack said. "We name a fund after them, and that fund generates an amount of earnings every year they are allowed to direct to a charity of their choice. You receive approximately 5 percent of the market value of the fund to use on an annual basis. When you apply a 5 percent spending rule, that insured fund is going to grow over time and provide more and more support into the community.

"When you want to make a gift, call us or send a letter. We do some due diligence on our end, to make sure the grant you want to make is for a charitable, bona fide purpose. Then we send a check on your behalf."

Zack said a minimum gift of $50,000 is recommended to establish the donor-advised fund. She contends that a private foundation demands a minimum of $5 million to be effective and cost-efficient. Yet many local family foundations report to the IRS assets that fall far below that $5 million mark.     

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