The Private Foundation Paradox
Full Spectrum Philanthropy

The Private Foundation Paradox

Focus first on goals and values, instead of taxes.

In making a business or investment decision, most people identify their goals first and then explore tax-efficient ways to meet those goals.  Yet, in our experience, this process is usually reversed in planning to give money away, rather than make it.

In planning their giving, individuals in the U.S. often give foremost attention to saving taxes – charitable remainder trusts for income tax saving, charitable lead trusts for estate and gift tax saving, and private foundations for saving taxes across generations.  The selection of less common alternatives, such as a support organization or donor-advised fund, is often made to achieve greater tax benefits, and not to gain the intangible benefits that those alternatives can provide.  This tendency to give priority to tax issues mistakenly puts the means before the ends.  It prematurely narrows the pathway of productive thinking.

Make goals your first priority, then ways and means.  Start by asking questions.

  • Beyond saving taxes, why do I need a private foundation? As a family activity? To promote family values, and if so, whose values? Can my great grandchildren spend "my money" to finance views that I oppose? Who has a stake in the future of my foundation?
  • Do I believe private charities can make government programs more effective? Do I value policy-making over field work? Do I value planning for a better world over relief of current suffering? 
  • Do my words reveal my intentions? What if circumstances change?    What if I endow a zoo and zoos become obsolete? Why did I fund the zoo? To support fun activities for children? Or because I like animals, or zoology, or the zoo's educational message or radical new design?  Did I believe my community needed a new tourist attraction? Was the zoo director my close friend?
  • What is the true value of the tax dollars saved by the proposed gift?    Are the savings realized currently, and who benefits? Do the savings simply increase the size of my estate that will pass to charity later? If so, at what cost in loss of flexibility?  Have I overlooked something else that my family truly cares about?
  • If I believe globalization is a long–term trend, why is all my giving coming to rest in the United States? Why is my foundation here? Is this myopic?
  • Have I overlooked choices and opportunities to deal with change?
  • Do I know how most wealthy families choose to plan their philanthropy? Do I know why those are the customary choices?  Do I want to choose that path?

Full Spectrum Philanthropy

Private foundations are “private” in name only.

Most family foundations are private foundations, and all private foundations must disclose their finances and giving programs to the general public.  The information is often on the Internet.  This is hardly “private.”  Fortunately, donor details need not be disclosed, but this clearly is not the  comfort zone of privacy you would expect for your family’s philanthropy.  Other choices are available.

A simple “org chart” may not be simple. 

Private foundations in the U. S. are saddled with tight tax rules designed to preclude the mere possibility of abuse.  Creating a single family foundation may seem simple, but it could be the first step down a long trail of complexity and constraints.  Moreover, using any one vehicle for the wide spectrum of a family’s charitable giving – such as a single private foundation – may hamper the family’s ability to fund certain kinds of programs, and limit the ability to adapt to changes.  Better choices can be made by using multiple giving vehicles…or using vehicles that are more complex to get started but simple to operate.  You can build a house with a hammer, but it's easier to do with more tools and sharper instruments.

Family philanthropy needs a good business plan.

Giving is intended to make a difference.  The discipline imposed by a sound planning process helps yield positive results in charitable giving just as it does when the goal is making money.

Outside board members are more valuable in a family foundation than in a family business.

Family foundation boards need more “outsiders.”  A family that runs a business has grown with it and knows it well.  The same level of first-hand knowledge and in-depth experience is much less common when the mission is to run a foundation.  It’s a different world with different incentives, methods, and measures of success than the business world.  More family foundations should recruit outside advisors experienced in philanthropy.

Even a family that has an established foundation can benefit from the advice of others.  Every organization needs to reevaluate its operations and programs from time to time.  Yet the milestones in philanthropy are more intangible, the relationships between means and ends are less certain, and the goals are harder to define.  Passion and opinion shape both the issues and the answers.  The difference between being a defender-of-values and a prisoner-of-bias is subtle and subjective.  The dispassionate advice of an “outside advisor” often helps the family reach a positive consensus, particularly if the advisor has already secured the family’s trust through years of service on the foundation board.