Daniel Mace, CPA, PA


The Family Foundation: Sharing Wealth and Values

A family foundation can be a tax-efficient way to share some of your estate with causes that are important to you.

Donating to charities whose work is important to you can be a satisfying way of sharing the fruits of your financial success. But finding the most effective vehicle for charitable giving can be challenging.

One option you may want to consider is a family (or private) foundation. In addition to being a mechanism for making charitable gifts and bequests, a family foundation offers a number of tax and estate planning benefits and can encourage the tradition of charitable giving in future generations.

The Basics

A family foundation is a charitable entity generally set up and funded by an individual, a family, or a corporation. The assets used to fund it -- the endowment -- are invested to generate the income the foundation needs to pay its operating expenses and make charitable gifts. The foundation generally must distribute at least 5% of its investment assets for charitable purposes annually to avoid harsh tax penalties.

Targeted Giving

Creating a family foundation dedicated to supporting specific causes and organizations allows you to focus your charitable giving and prevents you from impulsively donating to causes that are only marginally important to you. When you establish your foundation, you'll generally define the types of organizations or projects you intend to support. One of your first tasks should be to create a mission statement describing the foundation's focus, areas of philanthropic interest, and funding priorities. Developing clear guidelines for grant seekers can help reduce the number of requests you receive that don't fit your funding criteria.

Tax Benefits

You're entitled to a current federal income tax deduction for money or assets you transfer to the foundation (within various limits). Because of its charitable status, the foundation can sell appreciated assets that are transferred to it without exposure to taxes on the gains. And, since they're not subject to regular income tax either, most of a foundation's investment earnings can be used to support the charitable mission of the foundation.

Estate Planning Benefits

A family foundation can offer estate planning benefits for high-net-worth individuals. Contributions you make to a family foundation reduce the value of your gross estate for federal estate tax purposes without affecting the availability of your $17,000 (per recipient) gift tax annual exclusion or the current $12.92 million (inflation-adjusted) gift and estate tax exemption, for 2023.

Other Benefits

As the foundation's founder, you retain control of how foundation assets are used to benefit others. If your intent is for the foundation to be permanent, involving family members in the operations can prepare them to succeed you in the future. Even more important may be the opportunity the foundation provides to share your values and pass along your legacy of philanthropy.

Rely on Expertise

Setting up a family foundation can be a complex and expensive process that may take several months to complete. Before you begin, find a competent legal professional who is familiar with the laws relating to establishing and operating family foundations in your state.