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The Family Foundation: Frequently Asked Questions
ANSWERSCan I pay my children for running my foundation?Yes, but with several conditions to remember. First, if your foundation is a California nonprofit corporation, then the Board must consist of a majority of "disinterested" directors, who are usually non-family and are not receiving compensation as officers or employees. In all states, the compensation must be reasonably commensurate with the services provided, and should be determined by independent directors, after consideration of the background, skill, time, and effort of the employee, as well as a review of the compensation provided by other foundations in similar circumstances. Don't be confused by compensation to board directors for services rendered in that policy making capacity, with compensation as an employee for the day-to-day operations and administration. Is there any advantage to a corporate form of a foundation, compared to a trust form?It is possible to operate a foundation in either legal form - corporate or trust. The choice depends on several factors. First, a corporate form offers better liability protection for the directors and officers than a trust form, although this difference can be mitigated through adequate Directors' and Officers' Insurance. Second, the corporate form is considerably more flexible than the trust form, since the Board of Directors of a corporation can adjust the structure and operations, as they may determine appropriate through the years. This is more difficult in a trust form, since only the trustee can make this decision, and only to the extent expressly permitted in the trust document. Often courts have to rule on any changes made to a perpetual trust. Sometimes the choice of structure is really the preference of the legal counsel, who may be more familiar with one variation or another, although this should not really be the overriding factor. How do I assure myself that my family will always have a position on my foundation?By structuring the Bylaws (or Trust Agreement) to require, or at least reserve, a space on the Foundation Board for a family member, you can better protect the participation of future generations. Remember that the term "family" should be defined clearly. Do you mean your natural born children, and their issue? How about spouses? Adopted children or issue? Domestic partners? I have three children, but each of my children has a different number of children. How do I make it fair amongst my grandchildren?What happens as my family grows in numbers? As the family grows in size, and spreads out around the globe, it will become even more important to have a clear and fair transition plan in place. It may be important to maintain the balance amongst the different family groups, and it will certainly be important to establish the standards and criteria for Board participation, tenure in office, responsibilities and authority of each Board member. You should think about how your Foundation will be governed 3 or 4 generations from now. If the plan is logical and fair, it will survive and thrive. If not, the future of the Foundation could be tumultuous. Is there a better state to establish my Foundation than others?It may depend on what activities you intend to engage in, how the Foundation will be governed, and what potential liabilities the directors or trustees might incur. Experienced foundation legal counsel can best answer this question. It is not, however, as simple as looking to the state in which you or your family may currently be living. Can I rent a portion of my office building to my Foundation?The sale, lease, or rental of property from a "disqualified person", which includes the founder and family members, to the Foundation is prohibited. It would create "self-dealing", and cause both the Foundation and the offending party to incur an excise tax. In some cases, the transgression could cause the loss of the Foundation's tax-exempt status. Can I pay the expenses of my children and their families to come to a Foundation Board meeting?The Foundation may pay the reasonable expenses incurred by a Board member, or someone serving in an official capacity for the Foundation, including travel and hotel accommodations, in connection with Foundation business. However, this does not necessarily mean that other members of the Director's family can be reimbursed for their expenses. Be sure that everyone who receives some reimbursement is serving a real function for the Foundation, and that the expenses are directly related to that function. I want to have my young grandchildren become involved in the Foundation, through its governance and grant making activities. How do I do this?Structured properly, a "junior board" of the younger generation can serve as a springboard for future leadership on the operating board of the Foundation. You may find that children, as young as 8 to 10 years of age, can function well in an organized grant-making role. They can also participate on committees related to administration and even investments. This is an opportunity to mentor, educate, and inspire - you may be surprised how much the older generation will learn from and be inspired by these young adults and maturing children. I've thought about forming a foundation, but want to compare this to a donor advised fund. Which is better and why?The "best" choice depends on your short-term and long-term goals, the family structure and dynamics, and even the size of the wealth that you anticipate contributing over time. Donor advised funds, whether operated under a traditional public charity, such as a community foundation or United Way, or under the auspices of a commercial for-profit company (like an investment firm or bank), serve an important function of providing relatively low-cost permanent endowments for charity. For the time being (and this issue is still under review by the Congress and Treasury Department), a donor can advise the sponsoring foundation regarding the founder's preference for distributions. It's not the same as having the power to direct the foundation, but the preference or request is routinely honored. In many cases, this power to advise will only continue for a limited period of time (e.g., two generations), after which the funds revert to the general endowment of the foundation, subject to its sole control and direction. The obvious advantages include the avoidance of the cost of formation and the speed with which the process can be implemented. A community foundation usually has full time, experienced professionals who can help guide the donors on their philanthropy, and the costs of the operations are often less, because it is shared with other donors and their funds. However, the role, authority, and responsibility of family members through the generations will clearly be very different in a donor advised fund than in a private family foundation. The choice should be based on a careful and impartial comparison of the benefits, burdens, costs, and overall economics of both approaches. In this area, as with so many others, the advice given may be affected by the way the advisor is paid. So, proceed with care and prudence. I've been advised to establish a supporting organization, because it has better tax advantages, than a private foundation. Is this true?A supporting organization is actually a private foundation as well, but it is treated, for tax purposes, as a public charity. This is because, under the tax law, it is so closely connected to at least one public charity that it is almost a part of that organization. The connection can be achieved by having a majority of the Foundation's board appointed by the public charity. Or, the purpose of the Foundation can be to support specific projects of the public charity; in such amounts that the government can be reasonably assured that the public charity will be supervising the activities of the Foundation. The special tax status is granted because Congress is comfortable that the public will be protected, through the oversight and control by a public charity. Be careful, however, because the IRS has increasingly scrutinized both the applications of new supporting organizations, and their operations, just to be sure that there is such active oversight and control. |
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