When the Nelson Family Foundation decided to give $50,000 to the Food Bank of Iowa to help address a spike in need because of COVID-19, the plan was put into action quickly.

“I think we initially had the idea on a Friday morning, and by Monday afternoon the check had been cut and we had made contact with the food bank,” says Mary Katherine Nelson, chair of the Nelson Family Council. “It was a much quicker turnaround than what we’re used to. But luckily, with our structure, we were able to make those decisions quickly.”

The Nelson family owns Kemin Industries, a Des Moines, Iowa-based global company that produces ingredients for human and animal food. The company has more than 2,800 employees and operations in 90 countries.

The foundation is run through the family council, which consists of five members, representing each of the second-generation branches. The council works with R.W. and Mary Nelson, who founded Kemin in 1961, to make funding decisions.

Because Kemin serves the food industry, “food security is very important to not only the company but the family, as well,” Nelson says. “So the food bank really fit that goal.”

The Nelson Foundation’s gift was designated to go directly toward meal programs. According to statistics from the Food Bank of Iowa, the donation would provide about 200,000 meals.

“We have members from the first generation through the third generation that are a part of the decision-making process,” says Nelson, a third-generation married-in family member. “It’s really been a good tool to unite the family and get people involved at different age levels, those that work inside the company and those that don’t.” About 60% of the family lives in Iowa, Nelson says; the others are spread from Seattle to Baltimore, plus one family member in Italy.

The Nelson Family Council was established in 2017. “The family council process is still relatively new to us,” Nelson says.

The family has been invited to join daily video updates on the business hosted by Chris Nelson, Kemin’s second-generation CEO. They have also received meeting notes from the steering committee organizing the company’s global response to the pandemic. “It’s more information and more frequent updates than we usually get,” Mary Katherine Nelson says.

While adhering to social distancing, the family has had weekly lunchtime video calls that usually draw eight to 15 people. “R.W. and Mary, the G1 members, really enjoy getting to connect with some of the grandchildren throughout the week,” Nelson says.

“R.W. and Mary have been very involved in the company since they started it,” she says. ‘Their personal values have certainly trickled into the business and continue to be important.

“Their legacy in the community is that they’re very generous people, and give back in lots of ways — time, talents, energy, all of that,” Nelson says. The foundation is “a special project for the family, because it was so important to them.”

The foundation and Kemin are longtime supporters of Habitat for Humanity. Family members and Kemin employees have participated in local and international Habitat home-building projects.

In addition to the foundation’s gift to the Food Bank of Iowa, Kemin donated nearly 10,000 personal protective equipment (PPE) items to the Iowa Department of Public Health.

“Kemin being a laboratory- and a science-based company, they had a lot of that material on hand, and went through and donated any excess that they had — obviously, retaining enough to make sure that our employees are protected,” Nelson says.

Kemin teams in Italy and Belgium have donated PPE to their local hospitals, including homemade masks for healthcare workers. An internal fundraiser collected more than €13,000 for a hospital in Verona, Italy, where Kemin operates. The company matched the donation.

To help its U.S. employees obtain food, Kemin bought its U.S. employees GrubHub gift certificates (or Walmart gift cards for employees outside GrubHub service areas) and arranged for delivery fee waivers for employees who order groceries online through Midwest supermarket chain Hy-Vee.

The company also set aside $1 million to pay bonuses to employees in North America who worked on site during stay-at-home mandates and shelter-in-place orders.

Kemin has implemented other bonus programs to support teams at global locations. 

See here for more information on Kemin Industries' social-responsibility initiatives.

Philanthropy may keep family members engaged in the family business (including those not otherwise working in it) and can promote family values. Even so, the unique circumstances of business families can raise some challenges for effective giving.

Many family firms incorporate philanthropy into their business model in order to align the family’s core values and the business strategy. The family’s personal drive to “give something back” may be at the heart of family business giving — and the business giving may sit alongside a parallel family foundation that reflects family members’ personal giving priorities. Other families may be swayed by employees’ and customers’ deeper connection to a firm that is actively engaged in improving local conditions, supporting projects aligned with the core activities of the business, or simply “doing good.” And as businesses of all sizes and across sectors become increasingly aware of market perception and branding, being regarded as a “good corporate citizen” may have strategic value.

Some family firms have been giving for generations, often in parallel with the family foundation. Others may start giving when the success of the business, or the profile of the family, grows so much that failing to give could be detrimental.

The top 10 mistakes
Families who wish to start, or refine, a giving program should be careful to avoid the following common pitfalls:

1. Assuming giving is easy. Those who have worked hard to build or sustain a family business may believe that giving money away is “just fun.” However, effective giving requires strong engagement and deep commitment, as well as careful planning and sound guidance when warranted. The family must pay as much attention to its philanthropic initiatives as it does to its business or investment activities.

2. Blurring the lines between the family philanthropy and the business. Most jurisdictions prohibit charities from subsidizing private business. The tax breaks and preferential status charities enjoy come at the cost of limitations on their activities. Particularly when a family name is featured in both the foundation and the business, it is important to approach this issue with care. For instance, if the business sponsors a museum exhibition and the family foundation additionally contributes to the museum, care must be taken to ensure the foundation’s gift is not providing the business with any benefits beyond those merited by its own level of sponsorship.

3. Failing to think strategically. It is said that many people go into philanthropy with “open hearts and closed eyes.” While it is important to harness the passion of those involved in the family foundation, families who don’t think strategically about impact are missing an opportunity. Just following the passions — or whims — of family members on the foundation board may do little to improve family cohesion, can alienate the next generation (if the board does not include them) and ignores the benefits of giving in synergy with the business activities. Setting aside a sub-fund for ad hoc giving may be a solution to this ­conundrum.

4. Ignoring succession planning. Like succession in the family business, succession in the family philanthropy is inevitable, even if it’s difficult to accept. The situation can be particularly difficult if the business succession is complex or fractious. It is tempting to put off succession decisions, but dealing with the issue proactively is by far the better option.

5. Relying too much on employee initiatives. Some families keep their family giving totally separate from the business. Others may seek to involve employees and contractors in corporate social responsibility activities that the family foundation also funds. This may be smart on a number of levels; for example, employees can feel like part of the family when this works well. However, if the balance is off, savvy employees (and the public or press) will notice. For instance, if employees raise funds for a local children’s hospice and the family foundation matches the funds 2 to 1, the effort will be well regarded. But if the amount given by the family personally is minimal, it may seem that those who can better afford to give are riding on the coattails of the less wealthy.

6. Overlooking conflicts of interest. Family foundations are likely to have conflicts of interest or duty on the foundation board that must be declared and managed. This issue is amplified for business families. Family members who serve on the foundation board and are also employees or officers of the business will have a conflict of interest any time the foundation makes a grant to a project the business supports or sponsors. Depending on the jurisdiction, foundation conflicts are often manageable, but some formality around board decision making may be required.

7. Assuming everyone will always get along. All family foundations, whether connected to a family business or not, are affected by family dynamics and changing relationships. A board may operate by smooth consensus for a period and then may find that external stressors — such as business succession or divorce — invade the foundation governance. Depending on the family, managing these issues can be hard work or seemingly impossible.

8. Keeping family governance and wealth structures too separate. Many families compartmentalize; they keep the family wealth/business on one side of an imaginary line and the foundation on the other. There is logic to this approach. After all, the foundation’s assets no longer belong to the family; they are subject to special regulation and oversight. However, holistic planning for the family enterprise must include consideration of the family’s philanthropy. It can be extremely inefficient to deal with estate planning separately from succession planning for the family foundation.

9. “Parking” family members in the foundation who are not up to the family business. Family members who are underperforming in the business should not be “demoted” to the family foundation. It is true that a family foundation may offer a great opportunity for educating the next generation in financial management, responsibility and family values. If there is a real desire to include an underqualified family member in the foundation, the board has a responsibility to ensure that person does not represent a risk to the foundation. The family member should not serve as a fiduciary (i.e., foundation director or trustee), and should be subject to sufficient oversight and control to ensure the foundation’s assets are not at risk. In the extreme (and depending on jurisdiction), the board members could be individually responsible for redressing any loss the foundation suffers if, for example, that family member embezzles charity funds.

10. Assuming that getting it wrong carries no real consequences. There can be a sense that the foundation is a safe environment and that there are no real consequences for philanthropic missteps. After all, the assets were to be given away in any event, so there is no detriment to the family if the money is given to one cause or another. But the “halo effect” that giving is said to have can easily become just the opposite if the family foundation is mismanaged. In most jurisdictions, misapplication of funds and other breaches of duty can lead to real consequences for the foundation, including in some circumstances individual board members. Where the association of the foundation with the business has been prominent, or where the family name is shared between the business and the foundation, the business can also suffer reputational damage. The board should be sure to have a good grounding in the operational compliance of the foundation and proper oversight of all projects and initiatives. Delegated authorities should be reviewed and risk properly assessed. If things go wrong, tackling the problem head-on, with reputation management advice if needed, is the only way forward.

The benefits of family philanthropy, especially for families connected to a business, far outweigh the challenges. These pitfalls can be avoided with sufficient care and mindfulness.

Alana Petraske is special counsel at Withers LLP.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

Tag: Beyond the Bottom Line

Few would argue that vision and discipline are essential to make money in a family business. The same ingenuity is needed to donate money in a way that feels right to all family members.

As family businesses achieve significant wealth for their owners, philanthropy tends to become increasingly important to the family. Many factors spark the interest, including a desire to give back to the community that supported the business, passion for a particular cause and the hope of doing meaningful work together as a family.

Yet the same relationship issues that affect the business also impede a family’s charitable pursuits.

The Root Family Foundation, based in Ormond Beach, Fla., had to overcome hurdles when the last of the third generation, Susan Spear Root Feibleman, died three years ago. The family’s original business, Root Glass Company, designed the first Coca-Cola bottle in 1916 and made canning jars. After the glass company was sold to the Mason Co. in the 1930s, the family operated a Coca-Cola bottling business until 1985 and then invested in such diverse fields as hospitality, aviation and citrus. Since 1992, the family enterprise has focused on commercial real estate.

Although the Root Family Foundation dates from before the turn of the 20th century, few family members had roles until the century neared its end.

“After my father died in 1990, my mother involved us a lot more, so from the 1990s on it was much more of a family effort,” says Feibleman’s son Preston Root, 55, president of the Root Family Foundation. “My mother’s encouragement and tutelage were instrumental in us having the qualifications.”

But when Feibleman’s descendants inherited leadership of the foundation, they faced a new set of decisions. “My mother’s estate expanded the foundation a great deal, so it was a challenge of establishing our vision versus the vision of our ancestors, [as well as] the administration of a foundation that was approximately eight times bigger,” Root says.

Previous generations took the “give and go” approach, simply granting money to one charity or another. Today, Root family members are directly involved with the charities the foundation supports — organizations serving children and families with critical needs, such as medical issues, the loss of a parent, hunger and homelessness.

The fourth generation was eager to get the fifth involved in a meaningful way. The first step was realizing they had to engage the G5s, not just guilt them into doing their part for the family legacy. Root recalls a conversation he had with a niece. “I asked her why, [since] she was philanthropically minded, she wasn’t involved in the foundation,” he recalls. “She said, ‘I know nothing about it.’ ”

The G5s ultimately resolved the issue on their own a few years ago. They developed an innovative video grant-application initiative. Organizations that are invited to apply for grants fill out a one-page form, supplemented by a video they can shoot with a smartphone. The family goes online to view and vote on the proposals.

“It’s a way to connect people with the [organizations’] stories, but also to involve G5 and for us to support the organizations G5s are connected with,” says Root. The videos, he explains, depict “real people and real emotions.” For example, a facility seeking funds to refurbish its kitchen could make a video showing what its current kitchen looks like, juxtaposed with plans for the renovation.

Advantages of a family foundation
Family foundations are on the rise. According to the Foundation Center in Washington, D.C., there were 42,008 family foundations in the United States in 2014, a 9% increase over the number in 2010. Giving by family foundations has been increasing since 2002, with only a very slight dip during the recession in 2009 and 2010; the uptick resumed in 2011. Of the $52 billion given away by U.S. charitable foundations in 2014, nearly half — $25.9 billion — was given by family foundations.

A well-run family foundation can be more than just a vehicle for making a societal impact. It also can be a unifying force for family members and a way to create an enduring family legacy.

The Tracy family, which owns Dot Foods, the largest food industry redistributor in the U.S., decided to create a foundation in late 1995/early 1996. The company, founded in 1960, today delivers 112,000 products from more than 830 manufacturers to distributors in all 50 states and more than 25 countries. The Tracy Family Foundation was formally established in April 1997.

“We feel very blessed as a family and a family business, and we wanted to take the morals and values of the founding members of the family and give back to our communities,” says third-generation member Lauren Tracy, 37, a member of the foundation’s board and senior business development manager at Dot Foods.

“Everyone had the opportunity to voice an opinion,” says Tracy. “We had sessions where the family could talk about what means a lot to them.” Through this process, the family determined the foundation’s focus areas: education, youth and family, leadership, and economic development in the Brown County, Ill., region (where the family business is headquartered).

A family and its business can make a philanthropic impact without a foundation. But a family foundation provides considerable benefits for those who have a substantial amount of money to give away. Some of those advantages are financial. The foundation structure can offer savings on estate and capital gains taxes, in addition to salaries for family members who work for the foundation.

There are other benefits, as well. A foundation gives a family control over how their charitable dollars will be spent (compared with giving the money to a charity that determines the use of the funds). It provides a vehicle for family members to work together. And it can serve as a training ground for next-generation members on a range of topics, such as finance, governance and, of course, the family values.

A family must weigh those advantages against the costs. Starting up a foundation involves legal and accounting fees, plus other expenses. Most private foundations are subject to federal excise taxes. Staffing and other overhead costs must also be factored in, and the foundation must comply with recordkeeping, annual reporting and regulatory requirements. Many families have opted to establish a donor-advised fund (a tax-advantaged investment strategy that benefits a charitable organization) in lieu of a foundation to save on overhead expenses and avoid regulatory filings.

What can tip the balance in favor of establishing a foundation is the discipline the structure provides, which helps ensure a lasting entity — “something tangible around which the family can gather for generations,” says Lindsay Matush, CEO of Vario Philanthropy, a St. Louis-based consulting and management firm. 

A foundation — with its attendant reporting requirements — provides a degree of formality, predictability and consistency, as well as a rallying point for current and future generations, Matush says.

Giving strategically
A clear mission statement helps a family determine where their charitable dollars would make the biggest impact, Matush notes. Should the foundation make a grant to an established organization run by an old classmate of the patriarch, or would it be better to fund a startup charity suggested by a next-generation member? Assessing how each of the two options fits in with the mission makes the decision seem objective, rather than a disagreement between two family members.

A mission statement should be specific, Matush says. Families who want to fund education, for example, should consider what kind of education they want to support: Local or global? Urban or rural? Early childhood? Special needs?

Decide on the impact your family wants to achieve and then determine how you will measure that impact, Matush advises. Such a thought process helps your family identify which organizations should receive funding — i.e., those that are best able to achieve the desired result.

For example, consider a family foundation that wants to help students who are the first in their families to attend college. The family might brainstorm about what these students need—community role models, funding for college visits, SAT tutoring and the like. Organizations that can fulfill these needs would be good candidates for funding from the foundation.

“I think it’s important for families to spend time developing focus areas — what they want to support — and what that looks like, to be very clear if a grant is good fit for the funding model,” says Tracy.

For the Tracy Family Foundation, she says, “It’s been an evolution of starting very small and identifying our focus areas, then growing and determining together as a family if we want to be proactive or reactive in how we fund programs,” for example, deciding whether the foundation should partner with other agencies.

The Root Family Foundation has altered its mission over time to reflect the evolving interests of family members and changing societal needs. From evidence uncovered in old records, the family estimates that Chapman J. Root, who founded the business in Terre Haute, Ind., started a formal program of giving in the region around 1885.

“As a young man, my great-grandfather decided that philanthropy was part of his duty to the community,” says Root. “There were numerous examples of charitable things he did, from small things like community picnics to funding the first lit baseball field in the community.”

The Root family is widespread now, and members want to make an impact in communities where they live.
“My job as president is to mold an organization that provides outcome-based results and builds camaraderie, capacity and caring internally within the family,” Root says.

Root says his family has not fought over funding. There have been disagreements, but they have been resolved through “compromise, creativity and patience,” he says.

“One of the things we learned as a family foundation is that ‘no’ doesn’t mean ‘never,’ it just means ‘not right now,’ ” Root says.

Appropriate roles for family members
Good governance is essential to ensure the foundation will fulfill its mission and will not perpetuate dysfunctional family dynamics.

A family foundation should be taken seriously; it should not be used as a dumping ground for underperforming family members, Matush cautions. “While nobody says, ‘I am going to start a foundation so crazy Uncle Joe has a place to work where he can’t damage the business,’ it doesn’t mean the thought isn’t there,” she says.

Often, it’s a next-generation member who’s assigned a role that he or she is unfit to fill. Parents appoint children to foundation positions to give them a paycheck, make up for parental absences when the kids were young or attempt to rehabilitate offspring who were spoiled while growing up.

A foundation should be a vehicle for proactively passing down family values, not a reactive fix, Matush says. “If a child is spoiled, self-centered and irresponsible with their own assets, they’re likely to be so with foundation assets, and disinterested in foundation work,” she warns.

Even if the next generation lacks the right stuff to serve as foundation stewards, the door can be left open for future family involvement. Matush says one of her client families hopes philanthropic values not shared by their children might someday resonate with their grandchildren. The parents appointed trustees to manage the foundation and are creating videos explaining the family values. The foundation established a matching gifts program for the children and grandchildren. If any of them later show charitable inclinations, the trustees are tasked to nurture those interests and possibly create a place for the family members on the foundation board.

Inclusion of the next generation doesn’t necessarily mean they will have a voice. “If Mom and Dad make all the decisions in the business, chances are they will in the foundation, even if it’s supposed to be equal,” says Matush. That’s not necessarily a negative thing — as long as the decision-making process is clearly understood and everyone accepts the situation, she says.

At the Root Family Foundation, “I feel strongly about using my experience to help develop the fourth and fifth generation,” Preston Root says. Today, four G4s and three G5s serve on the foundation’s board; their ages range from 26 to 64. Board terms are three years and re-election is encouraged, which means most directors serve for six years. They are asked to stay active one year past their term to help phase in new board members.

Should a family member want to get involved when there’s no open board seat, Root says the person would most likely be given an informal “internship” of about one year, to gauge his or her commitment. After that, chances are the board would vote to expand so as to add the family member.

“We’re flexible,” Root says. “Like any non-profit, we gladly accept talented, committed people. We try to foster involvement and, when people show it, we want to accept it.”

Root’s 16-year-old daughter has expressed a desire to get involved. “I’ve asked her about her commitment,” he says. “If we change meetings to 3:30 p.m. so she can come after school, is she going to be there?”

No members of the Root family hold paid positions with the foundation, and there are no full-time staff members. Dawn Trimble, who works for the Root family office, devotes about 15% of her time to the family foundation. The family considers her service to the foundation as service to the family, Root says.

The foundation is “a colossal administrative challenge,” in Root’s words. Since its funding expanded after the death of his mother, the workload has increased, and volunteers are needed to get it done, he says.

At the Tracy Family Foundation, family members in the first, second, third and fourth generations are involved in a variety of capacities. The Tracys are a big family; Robert and Dorothy (“Dot”) Tracy, who founded the business, had 12 children, and there are 47 members of the third generation.

“We recognize that as we go through many different life stages — whether in school, college, getting married, raising a family or with different work obligations — different family members have different [blocks of] time they can commit,” Lauren Tracy says.

Many family members are involved in the foundation but not the family business. For instance, one of Tracy’s third-generation cousins has worked in education, so her perspective is helpful in evaluating funding proposals related to that field.

The Tracy Family Foundation has 10 directors as well as a separate next-generation advisory board, which has eight members. The board meets quarterly for a full day, with conference calls between meetings.

Currently, three G2 members and five G3 members serve on the board. Jean Buckley, Lauren Tracy’s aunt, serves as foundation president, a paid position. Two board seats are reserved for non-family directors.

Terms are staggered so the entire board doesn’t turn over at once. Most directors serve three-year terms, which are renewable. Two of the five G3 members are serving a one-year term, which enables them to gain board experience without a long-term commitment. Although these two directors have a shorter term of office, they have full voting rights, Tracy notes.

The foundation has multiple committees, including one dedicated to each of the four focus areas. Committee chairs report to the board but need not be board members.

Non-family member Dan Teefey was recently hired as the foundation’s executive director. In addition to Buckley and Teefey, there are two other paid staffers, neither of whom is a family member: program manager Terry Jenkins and executive assistant and grants manager Kim Bielik.

The foundation has developed ways to engage even very young family members, Tracy says. Members up to age 30 may participate in the Next Generation Grant Program. Each next-generation participant researches a community non-profit organization that he or she would like to support. After completing the research, which includes a site visit, the next-generation members submit a grant request. The youngest participant in this program (with help from her parents) is 6 years old; she’s the first G4 member to be involved in the family foundation.

Another initiative, called the Family Member Invitation Grant Program, is geared toward relatives living outside the Illinois region where the foundation is based. These family members may invite one organization in the area where they are currently living to submit a formal grant request to the foundation.

The foundation also offers a matching grant program that is open to all family members age 16 and older. “Once family members get exposed to our board, it stokes the fire of giving, and they go out from there and seek opportunities in their own community to participate,” Tracy says.

Occasionally there are disagreements about what should be funded, but having clearly established focus areas helps the board reach consensus, Tracy says.

Matush points out that intergenerational values conflicts can lead to disputes over funding in some family foundations. For example, the founding generation might be religious and politically conservative, while their grandchildren might espouse liberal causes. In such cases, she suggests, foundation board members should determine the organization’s top priorities. Can the decision criteria be adjusted so all generations can buy into the process?

Sometimes conflicts cannot be resolved. Matush recalls one client family whose foundation split into three separate entities so each generation could support its preferred causes.

“If the family can admit it’s just going through the motions and they’re there because they have to be, but none are really engaged in making a difference with the resources, it’s not wrong to say, ‘This is not accomplishing what it was meant to,’ ” Matush says.

Other foundations have dissolved by spending down their assets. Doing so in way that makes a major impact helps alleviate feelings of disappointment or bitterness. “It can be a nice final sign-off,” Matush says.
Root is committed to avoiding such a scenario. “If you’re not engaging the next generation,” he says, “you’re not guaranteeing the future of philanthropy.”     

Hedda T. Schupak is a business writer based in the Philadelphia area.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

The cover of the March 1990 issue of Family Business Magazine—the publication's third issue—featured Henry Bloch, co-founder of the H&R Block tax-preparation company, and his son Tom, who had just been named the company's president. "He has a tremendous business sense," Tom Bloch said of his father back in 1990, "and having had the opportunity to learn from him has given me a great advantage."

Two years ago, Henry Bloch used that business sense to create the Marion and Henry Bloch Family Foundation, officially launched on his 90th birthday, July 30, 2012. The foundation supports organizations that serve Greater Kansas City, where Bloch grew up, raised his family and founded his business along with his late brother, Richard.

Bloch, now H&R Block's chairman emeritus, recalls that the idea for the family's new venture was sparked by a conversation during lunch with his longtime attorney, Peter Brown. Bloch had long been extremely active in civic affairs and philanthropic efforts in his beloved hometown but wanted "to do something new," he says. Brown asked him, "Have you ever thought about starting a family foundation?" Bloch replied that he hadn't. As further encouragement, Brown supplied him with reading material on the subject.

According to Bloch, all of the reading material offered the same advice: "If you are wealthy and you leave the money to your family, [future generations] can be unproductive citizens. . . Odds are, they will grow up feeling privileged and not feel the need to work. That convinced me in a hurry to start a family foundation." Bloch plans to bequeath additional resources to the foundation through his estate.

Governance and mission

Henry Bloch is chairman of the family foundation, which is governed by a nine-member board of directors that includes all four of Henry and Marion Bloch's children (Robert Bloch, Tom Bloch, Mary Jo Brown and Elizabeth Uhlmann). Marion Bloch, who battled brain cancer, passed away on Sept. 24, 2013.

The other foundation directors are prominent members of the Kansas City community. When Henry Bloch retires as chairman, family members will be in the minority on the foundation's board. The foundation also has five trustees, who elect the directors; three of the trustees are family members.

Bloch has a long history of philanthropic largesse in his native city. He is past president or chairman of a variety of non-profit entities, including the Nelson-Atkins Museum of Art, Menorah Medical Foundation, the Greater Kansas City Chamber of Commerce and the University of Missouri-Kansas City. He is a trustee emeritus of St. Luke's Hospital and many other local institutions.

In 1974, Henry Bloch established the H&R Block Foundation, whose goal is to improve the quality of life in the Kansas City community. He continues to serve as that foundation's chairman and treasurer and as a director. While the H&R Block Foundation is broad in its scope and impact, the Bloch Family Foundation supports organizations that serve Greater Kansas City in several focus areas: post-secondary business and entrepreneurship education; visual and performing arts; education for poor, disadvantaged and underserved youth; health care; social services; and Jewish community organizations. It places special priority on funding programs and operations at three institutions the family has long supported: the Henry W. Bloch School of Management at the University of Missouri-Kansas City, the Nelson-Atkins Museum of Art and St. Luke's Hospital. "By contributing to these three organizations, we are raising the profile of the entire city," Bloch asserts.

"The relationship between the foundation and its legacy organizations is more of a partnership," explains David Miles, who serves as president of the Bloch Family Foundation as well as the H&R Block Foundation. "We work together to establish strategic funding plans and goals to raise the national profile of each institution."

Miles says the foundation's plans for the Bloch School include forming a full-time honors MBA program and establishing a university-wide entrepreneurship program. In December 2013, the foundation made a $12 million gift commitment to St. Luke's Hospital to establish the Marion Bloch Neuroscience Institute. "We want the institute to be a nationally recognized and ranked center for neurosciences," Miles says.

The Blochs' private collection of Impressionist and Post-Impressionist paintings will be permanently housed at the Nelson-Atkins Museum. "Much of our work is assuring the Nelson remains one of Kansas City's most important cultural treasures and one of the premier art museums in the United States," Miles says. "The foundation's current focus is preparing the Nelson for the arrival of the Bloch Collection." The museum's Bloch Building, a bold, glass 165,000-square-foot addition, opened in 2007. Time magazine ranked the building as the No. 1 "architectural marvel" that year.

Miles says Henry Bloch has been a mentor and an inspiration. "He has taught me so much about business and philanthropy, and I am honored to consider him a friend," Miles says.

New directions

Bloch, who still drives himself to his office every day, credits his longevity to good genes (his father lived to 95) and keeping busy. Though he has no formal involvement with H&R Block, he says he still visits the company's headquarters and attends annual meetings.

His son Tom resigned as CEO of H&R Block in 1995 to become a math teacher at an urban school in Kansas City and later founded University Academy, an urban college preparatory charter school. Tom chronicled these experiences in a 2008 book entitled Stand for the Best: What I Learned After Leaving My Job as CEO of H&R Block to Become a Teacher and Founder of an Inner City Charter School (see FB, Autumn 2008).

Tom Bloch, who had rejoined H&R Block's board in 2000, stepped down in 2010. In a letter to the board, he said he was leaving because of disagreements with then-chairman Richard Breeden over the company's direction and his concern that short-term returns would be emphasized over long-term shareholder value.

In 2011, Tom Bloch published another book, Many Happy Returns: The Story of Henry Bloch, America's Tax Man, an account of his entrepreneurial father's contributions in business, philanthropy and family life. "In an era rife with corruption and greed, Henry Bloch inspires us to work hard, be honest, and follow our dreams," Tom wrote in an author's note.

"My father is such a wonderful man, and writing about him was a true labor of love," Tom Bloch says. "I really feel so incredibly fortunate to have worked with him and learned from him."

Henry Bloch says that establishing the Marion and Henry Bloch Family Foundation was also a labor of love. "I can't think of anything better to do with my money," he says. "There are a lot of people in Kansas City a lot wealthier than I am, and they should do the same thing."

Copyright 2014 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

Last month, my husband and I blew into Chicago for the wedding of the son of one of my dear friends from college. While we were visiting, we strolled around the city taking in the natural beauty of the lake as well as the wonderful cultural institutions that dot the landscape. Chicago is an exciting, engaging city, which benefits from the many family businesses that form the backbone of the business community.

Over the years, these older families established and supported the city’s many arts, cultural and healthcare organizations. Famous names are displayed prominently on the buildings and in the parks, as well as on the walls of hospitals, art institutions, museums and theaters. The generosity of these iconic families—Fields, Wrigleys, McCormicks, Pritzkers, Crowns, Blochs, Adlers, Walgreens and Lavin/Bernicks—is visible throughout, and continues today as the next generation becomes involved.

Chicago is not unique in this altruistic aspect, but rather is typical of cities around the U.S. where family commitment has built the foundations of local society. As I encounter people at family business conferences, and in my own travels around the country, I am especially impressed by the public generosity of families who are connected to family businesses. Not only are names visible, but family members often serve on boards and committees as well as in local government in an effort to sustain and maintain their communities. Part of the family’s mission encompasses the promotion of their family business in addition to these eleemosynary efforts. There is no question that these families have a considerable stake in their communities.

Andrew Keyt, executive director of the Family Business Center at Loyola University in Chicago, agrees. “Because families are an ongoing presence in their community, they take an interest in its long-term viability,” he says. “Family businesses form the foundation of the philanthropic effort, primarily because of their sense of values and also because their name is on the door. They feel responsible for their employees and their communities. This leads families to support initiatives that enrich the lives of [all].”

Public corporations have a much more difficult time determining where the dollars go and how much to give. Their management must answer to a variety of stakeholders, and often there is no genuine commitment to the city, especially if it is not the corporate headquarters.

Next time you travel to another city, take note of the business families who have given back and who continue to be a major presence in their hometowns and beyond.

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

Family foundations aren't just for Rockefellers and Vanderbilts anymore.

Just ask John M. Sobrato, general partner of the Sobrato Development Companies in Cupertino, Calif. Ever since Sobrato's grandmother Ann founded the family's commercial real estate business in Silicon Valley in the 1950s, the Sobratos had supported community causes. By 1996, the Sobratos' success in building new office space led the family to decide it was time for them to join philanthropy's big leagues and form their own foundation.

The Sobratos are not alone. The Foundation Center, a New York-based philanthropic support group, estimates that there are now nearly 28,000 family foundations nationwide, many formed in the last decade. Collectively, those foundations gave more than $13 billion in 2001.

Why the sudden spurt in family foundations? A yen for immortality, for one thing. Douglas Freeman, chairman of the Institute for Family Foundations in Irvine, Calif., notes that the life expectancy of a family business is typically only about 25 years. In most cases, as statistics bear out, “It's just not going to go on for generations,” Freeman says. On the other hand, he notes, “Foundations can continue for multiple generations, perhaps forever.”

Other founders are motivated by a desire to pass on a sense of stewardship toward their community, philanthropic advisers say. For example, in 2001 the Roy A. Hunt Foundation in Pittsburgh allocated $55,000 to its Next Generation Fund for distribution by the foundation's three young adult trustees, according to a 2002 report from the National Center for Family Philanthropy, based in Washington, D.C. The trustees set up a separate budget as a mechanism for young family members to learn about grantmaking.

Family foundations are also often used as a tool for business succession planning, advisers say, either as a way to get the founder out the door or as an alternative inheritance for a child not involved in the business.

“Quite often there's a daughter in the mix,” says Curt Bassett, director of family foundation services at Merrill Lynch Center for Philanthropy and Nonprofit Management in Princeton, N.J. In many cases, he says, the sons run the business, while the daughters—who may also be juggling child-rearing responsibilities—manage philanthropic activities. A foundation, he says, “is a way of giving each family member a piece of the total family enterprise, which includes both the for-profit family business and the non-profit family business.”

One case in point: At S.C. Johnson & Co., three of the children of fourth-generation patriarch Samuel C. Johnson are in charge of major divisions: H. Fisk Johnson is chairman of S.C. Johnson & Son, S. Curtis Johnson is chairman of JohnsonDiversey Inc., and Helen P. Johnson-Leipold is chairman of Johnson Outdoors Inc. The fourth sibling, Winifred J. Marquart, is president of the Johnson Family Foundation.

A foundation can serve as a new challenge for a founder or CEO. “When you have made the kind of wealth that many of our founders have made, and you have reached the top of that mountain, and there's a liquidity event ... what do you do now?” Freeman asks rhetorically. A foundation “becomes a way of continuing the emotional and intellectual excitement that you might have once had in business.”

As an example, Freeman points to John V. Croul, former chairman and CEO of Behr Process Corp. of Orange County, Calif. After family-owned Behr, one of the largest paint manufacturers in the U.S., was sold to Masco Corp. in 1999, Croul formed the Santa Ana-based Croul Family Foundation. “Jack Croul represents one of many successful entrepreneurs who converted his financial success to meaningful and organized philanthropy,” Freeman says. “He has used his philanthropy to achieve some remarkable results,” including a $6 million donation to build an environmental science facility at the University of California, Irvine.

Tax planning can be a factor too, but deductions are limited on shares of a closely held family business, according to Bassett. Only stock in a public company can be deducted at fair market value. But in some special cases, a foundation can help families avoid capital gains or estate taxes. Yet Freeman says that tax planning should never be the primary motive behind setting up a foundation. “It is a feature, it is a factor, it is a facilitator,” he says. “It is not the cause.”

Lyman Orton, proprietor and chairman of the Vermont Country Store, may have the most persuasive reason of all for setting up a foundation now. “It's a hell of a lot more fun to do when you're alive than when you're dead,” advises Orton, who in addition to running his family's mail-order business in Weston, Vt., serves as chairman of the Orton Family Foundation of Steamboat Springs, Colo.

Costs and benefits

There's more to starting your own foundation than ordering some new letterhead. John Sobrato cautions that unless you intend to give away a great deal of money, the costs of running a foundation will probably outweigh its benefits. “There is a fair amount of overhead associated with running a foundation—having to have a staff and file reports and all that,” says Sobrato, whose family gives away more than $2 million a year through their foundation to aid community needs in Silicon Valley. “If you plan to give away a few hundred thousand a year, it may be more cost-effective to channel your gifts through a donor-advised fund in a community foundation.”

Financial advisers say that donor-advised funds, a special kind of investment account that allows the donor to manage and distribute assets to multiple charities at little or no cost, are often a good alternative for smaller philanthropists. “Basically, the only difference between my having a private family foundation and a donor-advised fund is that I don't get to sit on the board,” says Merrill Lynch's Curt Bassett. “I just get to advise the distributions of my endowment.” Many community foundations and other groups manage donor-advised funds, as do a number of banks, investment companies and brokerage houses. Investment firms charge management fees in the 2% to 3% range, but some community foundations and elite colleges will manage a donor-advised fund at no cost to the donor.

But foundation members and philanthropy advisers say there are some special benefits to running a family foundation. Sobrato says his family's foundation has helped provide the family with a chance to collaborate and develop shared values while they work on a common project. “Family businesses can certainly do all of that,” he notes, “but because a relatively small number of the family members participate in the family business, the family foundation has given us a broader platform to have broader family interaction.”

And, as Carnegie and Rockefeller found out many years ago, a foundation can also be an effective public relations tool. “We have found that the family foundation has been very good for business, in terms of building the family's stature in the community,” Sobrato says. “I won't say that necessarily we've gotten dollar for dollar back, but there is, I think, a pretty significant return indirectly to the business from the gifts [the foundation] makes.”

Orton of the Vermont Country Store says morale and productivity at his 350-employee mail-order company improved once word spread about his family's philanthropic activities—particularly at a time when many people are increasingly concerned about their employer's ethics. The Orton Family Foundation, dedicated to preserving rural America, supports projects such as low-cost software for land-use planning as well as a community video program (developed by one of Orton's sons) in which residents are given a camera and asked to make a movie of their community. “If the owner's doing some additional things that are good things and promotes those,” he says, “then I think it [motivates] people to get in there and help out.”

Risks and rewards

Profiting from such incidental benefits is fine, but foundation adviser Jerry J. McCoy of Washington, D.C., cautions that problems can arise if you start looking for a more direct return. For example, McCoy says, you can get into tax trouble if you try to use your foundation to solve other personal problems, such as acting as a buyer for art you no longer want, or paying for tickets to enable you to attend a charity ball.

But legal technicalities are nothing compared to the emotional wrangles that can arise within a family where there are disagreements about what the foundation's goals should be. Advisers caution that if you thought making the money was tough, just try giving it away. Freeman likes to quote McDonald's founder Ray Kroc, who once said, “It's harder to give money away well than it is to earn the money.”

Families often expect that forming their foundation will be much easier than running their business, Freeman says. “The biggest misconception,” he says, “is that we can just give away money and the kids are going to be happy and how much fun we're going to have.”

In fact, business families soon discover that they face all the same issues running a foundation that they faced running a business together—and more. “The problems that a family business encounters, often people think they are going to be able to cure them or mitigate them with a foundation,” says foundation planner McCoy. “For example, the children might be alienated from the family; they're not taking part in the business. Why not? Dad's such a control freak he drives them away. So, [they think,] ‘Let's have a family foundation so we'll all get together and make everybody happy.' But then it turns out that Dad's dominating the foundation too.”

Marty Carter, a family legacy adviser for Charles D. Haines LLC in Birmingham, Ala., says she often sees friction between family members who are trying to run a foundation. In one foundation she worked with, for example, a sister kept nixing all her brother's ideas. “Whenever he got excited about funding a project, she somehow squashed it flat,” she recalls. Carter ultimately discovered the underlying cause of the problems—sibling rivalry between the two sexagenarians. The sister resented the fact that the brother had been able to go into the family business, while she had been left out.

For Carter, the moral of the story seems pretty obvious: “Whatever is happening in the family, it's going to happen in the family business, and it's going to happen in the family foundation, unless people spend some time and some energy looking at those patterns.” To help families overcome those kinds of patterns, Carter leads retreats in which family members discuss their feelings about money. She also encourages family members to take the Myers-Briggs personality test, which can reveal ways for them to communicate more effectively with one another.

But even when people understand each other perfectly, honest disputes over what projects to fund are extremely common, philanthropy advisers say. Parents sometimes resist new directions that children want to take, such as support for anti-globalization or gay rights groups. Or if the parents are gone, children fight over what Mom and Dad would have wanted. Freeman recalls a case in which two daughters, one in favor of abortion rights and one against, fought over the direction of their mother's foundation—and what their mother, who gave to Catholic charities for women, would have wanted.

In another, well-publicized case, the two daughters of President Richard Nixon opposed each other in a legal fight over a bequest to the Richard Nixon Library and Birthplace Foundation left by the late president's longtime friend Charles “Bebe” Rebozo. Julie Nixon Eisenhower and the foundation wanted the money put into an endowment controlled by the foundation's 24-member board of directors. Tricia Nixon Cox wanted the money put into an endowment controlled by a three-person board consisting of the two sisters and a family friend, as specified by the trust left by Rebozo, who died in 1998.

Some families dodge disputes by setting up separate foundations for the second or third generation. Others compromise by subdividing the general fund into smaller pools, each controlled by a family member. Bassett says he often recommends the latter course.

“Typically, one of the best ways that a family foundation can minimize the potential for family conflict is by structuring a family foundation in a similar way as a community foundation is structured,” he says. Community foundations often administer the funds of many different donors beneath their larger umbrella.

Still other families simply let the next generation set an entirely new course. Emily Tow Jackson, executive director of the Tow Foundation in Stamford, Conn., notes that her parents allowed the foundation's philanthropic efforts to evolve beyond their original interest. “I don't think the rest of the family would have been as motivated to participate in the work of the foundation if they had just presented the mission to us,” she says.

The $38 million Tow Foundation was originally endowed with money from a now-sold cable television business, Century Communications Corp., which Jackson's father, Leonard Tow, co-founded in 1973. In the beginning, Jackson says, her parents funded mostly early-stage, cutting-edge medical research. Today, a large portion of the foundation's grants fund juvenile justice programs in Connecticut.

When the Tow Foundation began in 1988, Jackson says, her mother, Claire Tow, ran it out of a desk drawer at home. Today, the foundation has three full-time staffers. After Jackson took over as executive director in 1994, she tried to place the foundation on a more professional footing. One way she did that, she says, was by taking a more strategic approach to giving, “to really attempt to make changes, and not just write checks.”

This strategic approach involved something akin to market research. Jackson says her board chose their focus based on where the family's money could have the biggest impact. After a year of research, they concluded that the proceeds of the Tow Foundation's endowment could play a key role in reforming Connecticut's juvenile justice system.

“We're trying to really influence big changes in the way these kids are handled,” Jackson says. “It's been very exciting for us.” The Tow family's goals for the foundation may have changed since Jackson took charge, but its entrepreneurial spirit seems very much intact.

Bennett Voyles is a freelance writer based in New York City.

For more information

In the public's mind, private foundations are billion-dollar money machines funded by America's super-rich families. In reality, most of the estimated 20,000 family-managed foundations have assets of less than $5 million.

The misconception is understandable. The government originally created tax-exempt private foundations to encourage wealthy industrialists to set aside some of their fortunes for the public good. The hope was that by giving them unrestricted freedom to run their foundations, the wily tycoons that masterminded the industrialization of America would be equally imaginative in finding swift cures for society's ills.

Some families, like the Rockefellers and Carnegies, rose to the occasion. Others subverted the tax-savings benefits to their personal advantage by speculating with the foundation's assets and paying themselves exorbitant fees. During the mid-1950s and '60s, some newly rich families also discovered private foundations. Operating on a smaller scale, they funneled their charitable donations through a foundation to reap substantial savings on taxes.

The passage of the sweeping 1969 Tax Reform Act curtailed the most flagrant abuses of private foundations. Although it preserved their exemption from gift and estate taxes and virtual unaccountability in grantmaking, it instituted new demands: Foundations were required to distribute 5 percent of their assets annually, file reports of their investments and activities that the Internal Revenue Service makes available to the public, and pay an excise tax of 1 to 2 percent a year.

The new requirements discouraged the formation of private foundations primarily as a tax dodge. Meanwhile, the creation of several other new gifting vehicles—charitable remainder trusts, charitable lead trusts, and donor-advised funds through community foundations—provided attractive alternatives to foundations. Many wealthy individuals discovered that these vehicles offered similar personal and tax benefits without the time demands of running a foundation.

In recent years, family foundations have undergone a remarkable democratization. Once the privileged domain of America's wealthiest families, foundations are currently being promoted by legal and financial advisors as an estate-planning tool appropriate even for those with modest excess wealth. Their new popularity is in part a response to the booming '80s, which created new fortunes, and to the estimated $8 trillion transfer of intergenerational wealth predicted to occur over the next half century.

The trend also says something about the state of the American family. In the past, legal and financial advisers recommended their clients consider forming foundations because they offer personal satisfactions as well as tax benefits. Today, there is a new twist: the equally important and legitimate benefits families can derive from working together toward a common good.

At a time when families at all economic levels are unraveling, the private foundation holds the promise of gluing a family together over generations. Besides providing a forum in which family members can work together as equals, foundations present an unrivaled educational training ground for parents and children to develop valuable skills.

The cliché about the difficulty of giving away money wisely is true. Serious grantmakers need a large repertoire of skills to make intelligent decisions in the face of overwhelming need. For starters, they require an investigative mind to ferret out what the community that they serve really needs, what is already available and working well, and what is lacking. They also need financial sophistication to oversee the foundation's investments, to read an organization's balance sheet, and to evaluate grant proposals. Finally, they must communicate clearly among themselves and with community leaders, and have the modesty to know when to ask for help.

The government makes it surprisingly easy for inexperienced families to test the philanthropic waters. Private foundations can be established with a relatively small initial endowment—say, $250,000 (legal and administrative expenses may not justify a smaller asset base). Another option is to operate the foundation as a pass-through entity; donors can contribute small amounts annually until they feel comfortable and competent to grant large amounts. Or, if donors discover they don't have the talent or temperament for philanthropy, they can spend the foundation out of existence without incurring any penalties.

For all the advantages private foundations offer, enthusiasts sometimes oversell them as a cure-all for troubled families. Families mired in long-brewing resentments and rifts will inevitably create new battlegrounds within the foundation. And those with histories of never doing anything together and going their separate ways are unlikely to meld into a harmonious team. Some warring families have chosen to spend their foundation out of existence rather than serve together, and others have divided the foundation's assets and formed separate foundations.

In more than a few instances, tensions within the family foundation have exploded publicly in litigation. One widely publicised case was that of the Kirby Foundation of Morristown, New Jersey, in which a brother ousted his three siblings from the board of directors and replaced them with his wife and four children. The courts upheld the brothers, ruling that he had violated the law.

Operating a successful foundation is similar to running a family business. Family members must be passionately committed to their work, like one another reasonably well, and share similar goals and values. For the right families, foundations can provide one of life's most fulfilling and exciting experiences. But even those families must be willing to plan carefully and work on a long timeline.

A good example is the Payne family. Roslyn and Lisle Payne own Jackson Street Partners Limited, a real estate investment company in San Francisco. Several years ago Roslyn attended a conference at which Paul Comstock, a Houston financial planner, discussed the personal and tax benefits of establishing family foundations. For the past 20 years, Comstock has helped families and nonprofit organizations develop wealth-transfer programs.

Comstock assumes that his clients want to maintain influence over their money. Yet each time the wealth passes from one family member to another, estate taxes reduce the amount by as much as 55 percent—an act tantamount to appointing the government as their charitable adviser. Comstock advises clients to consider giving 100 percent of their excess wealth to the public good. That way, the family and not the government determines how it will be used.

“It was a totally new concept for me,” says Roslyn. “We have two young sons, and I was excited by the possibilities of creating something in which the whole family could work together to benefit society. The next time Paul spoke I took my husband along. Not long after, we began rethinking our estate planning.”

Their first step was to find good legal counsel on rewriting their will. Roslyn interviewed five lawyers before she found one knowledgeable about both estate planning and foundations. Like Paul Comstock, the lawyer asked them to consider how much money they wanted to leave to their children and how much they wanted to go to charity. The Paynes decided that their obligations to their sons included paying for their educations and putting aside money for them to buy houses. Beyond that, they expected them to be self-reliant.

“Once we started thinking along these lines,” says Roslyn, we wanted to have something in place, in case of a family tragedy. The lawyer suggested we follow a two-stage process to give ourselves time to learn about foundations. As a temporary measure, we put an initial lump sum into a charitable remainder trust and drafted language to allow for the transfer of funds to the foundation when it was established.”

Because the Paynes had a clear idea of what they hoped to accomplish, they had no trouble defining their foundation's mission: supporting sports and youth. Their sons are active in sports and Lisle volunteers as a coach for games around the city. Both the parents and children believe that sports promote the habits and values most important in life—discipline, focus, commitment to win, and the chance to make deep connections with peers and mentors.

The Paynes' goal is to have the foundation up and running within the next year. In the meantime, Roslyn and Lisle are continuing to educate themselves by talking with experienced grantmakers, and especially those knowledgeable about programs in their funding area. “We're setting up a foundation with the same time and care we would give to starting a business,” says Roslyn. “Right now we think the best use of our time is to learn from others and to check out programs we may want to fund in the future.”

Like most donors, the Paynes plan for their foundation to exist in perpetuity rather than for a limited time. They had two reasons for setting it up indefinitely. For one, they have willed the bulk of their estate to go to the foundation upon their deaths. For another, they view the foundation as a training ground for their sons to become future board members and, one day, their successors.

“We want our kids to be equal partners in making decisions when they come of age,” says Roslyn. “Once we begin making grants, we intend to talk over the funding choices with the boys as part of their informal training in how to evaluate organizations.”

Although the boys are only 15 and 11 years old, they have already absorbed their parents' values. After the 1989 San Francisco earthquake, Matthew, then 10, spearheaded an effort to create a haunted house in the family garage to raise funds for the Red Cross. Then, last year, both boys decided they wanted to raise money for a program in which star athletes worked with kids. Roslyn found one in San Jose, and Matthew instructed his younger brother, Andrew, on how to organize a successful fundraiser.

Before the foundation is established, the Paynes must make other financial decisions: How large should the initial endowment be? Which assets should they donate? What are the best ways to transfer their assets, and when? They also must make far-reaching decisions about governance.

Because of recent well-publicized cases of successor trustees attempting to alter the mission of a foundation set by the original donor, legal advisers are cautioning new donors to carefully spell out their philosophy and objectives. Donors who want to determine the foundation's future direction are counseled to set up the foundation as a trust, requiring their successors to get court approval to change the mission. Those who prefer to give future board members broader discretion in amending the bylaws to meet changing social needs can set up the foundation as a corporation.

The Paynes have still more governance issues to resolve. For example, who will serve on the board and for how long? “We know we want to include nonfamily members,” says Roslyn, “but we haven't specified their qualifications. Nor have we decided on term limits, other than that we want our boys to be permanent members. Working out all these details takes a lot of soul-searching, but it's a small price to pay if it helps us become better funders.”

The Paynes are clearly on the right track in planning their family foundation. Their mission is an extension of their family's interests; they have strong values which they are passing on to their children through shared activities; they have educated themselves about the legal and program aspects of running a foundation; and they have begun preparing their children for their responsibilities at early ages.

A long-range succession planning approach to foundations always works best. But families with adult children need not be discouraged from forming foundations. With good will and patience, the right families can surmount most obstacles. They can also benefit from the experiences of other family foundations. A case in point is the Lawson Foundation, whose nine-member, third-generation board—ages 38 to 76—assumed their grantmaking responsibilities without the benefit of training.

The foundation was established in 1956 by Ray Lawson with proceeds from a large, family-managed printing business, Lawson Mardon in Toronto, Canada. Beginning with an endowment of $2.5 million, the foundation's assets have surged to $41 million through additional contributions from the family.

Lawson singlehandedly ran the foundation as an extension of his personal charity until 1972, when he handed the reins to his son, Tom. Tom also ran the show alone, operating with a nominal three-person board. A few years before his death in 1990, Tom Lawson drew up a confusing legal agreement mapping out the future of the foundation and naming four of his six children as trustees. “Although my father showed us the completed agreement, we didn't understand it or its implications,” says Joan Vanduzer, current president of the foundation. “He would say, ‘I know you'll respect my wishes,' and nobody dared speak up.”

Vanduzer says her father's death left the family without a rudder. The family hoped the foundation would become its new center, but when the foundation agreement proved unworkable the family was thrown into turmoil. “We were out of our depth, and needed expert help,” Vanduzer recalls. Over the past four years, they have worked out a new structure and expanded the foundation's mission to include all of Canada. The Lawson Foundation assists education, child, and family programs and also supports the development of community foundations throughout the country. The new model better reflects the reality of their family—their trustees are scattered across the country—and the communities they serve. Although the board is beginning to feel more sure of its direction, the process has been stressful.

Says Vanduzer: “After my father's death, my mother decided that for the sake of peace in the family all six children should serve as trustees. We created an all-family board and included two cousins. I personally think this was a mistake. All-family boards are risky and need nonfamily members to balance the family dynamics. Another weakness is that board positions are inherited when they should be earned. I also believe that families have to take an honest look at themselves. Not all family members can work together; sometimes the personalities are too different.”

Vanduzer says that many foundation problems could be avoided if the donors set the same high standards and clear guidelines for family members in foundations as they do in running their businesses. She recommends two-year rotating board terms and specific qualifications for service. “Before coming on to the family board, the candidates should learn about nonprofit organizations by working as volunteers, serving on other boards, or sitting on the family foundation's grant committee. The donor and family members should also attend family foundation meetings sponsored by the Council on Foundations to hear from other funders. In these ways, they can demonstrate their interest, curiosity, and suitability for the work and know the responsibilities that go along with being part of this community.”

The third-generation Lawson trustees are just answering those questions for themselves. At the same time, they are beginning to think about which members of the next generation might make the best trustees. Luckily, the very nature of a foundation can make it easier for the family to make those hard choices. As Paul Comstock is fond of pointing out, the family foundation is the only estate-planning tool he knows of that allows parents to see how it works while they are still alive. Functioning as a virtual laboratory for leadership development, the foundation allows the older generation to observe their children's progress. How well they meet their responsibilities as board members, says Comstock, can be a gauge of how well they will manage their personal affairs when they are on their own.

Deanne Stone is director of the Family Foundation at Work project of the Whitman Institute in San Francisco.How a family foundation is governed

The Council on Foundations in Washington, D.C., defines a family foundation as one in which the donor or donor's relatives play a significant role in governing the foundation. A 1992 survey of 227 family business foundations by the council described trends in their governance, staffing, and management.

Family foundation boards tend to be run informally and to meet an average of five days a year. Succession training tends to occur on-the-job rather than in formal board orientation. Family foundations are also less likely to list formal board qualifications or set limits on the number of directors or the length of their terms. The chief drawback to limiting board size or letting trustees serve as long as they wish is that the members of the younger generation won't have a voice until they reach middle age. But if the size of the board isn't limited, it can become unwieldy as it enlarges with each new generation. Today, most family foundations prefer to have a few nonfamily members on the board, too—individuals invited for their expertise, relationship to family (often a lawyer or accountant), or because an outsider is needed to keep a check on family emotions.

Smaller family foundations rarely have paid staff and typically rely on one family member to act as volunteer administrator. Generally, only the larger foundations compensate directors for service, although about half of family foundations reimburse directors for board meeting expenses. A popular perk is to give directors discretionary funds which they can donate to their favorite charities, often without board approval. - D.S.Help for forming a foundation

First Steps in Starting a Foundation, by John Edie, 1989. Council on Foundations, 1828 L Street, N.W., Washington, D.C. 20036. $30.

Starting a Private Foundation: Carrying out the Donor's Intent, by Paul Rhoads and Stephanie H. Denby, 1993. The Philanthropy Roundtable, 32 North Meridian Street, Indianapolis, IN 46204-1725. $7.50.

Building Family Unity Through Giving: The Story of the Namaste Foundation, by Deanne Stone, 1992. The Whitman Institute, P.O. Box 2528, San Francisco, CA 94026. $5.

Family Foundations Now—And Forever? The Question of Intergenerational Succession, by Paul Ylvisaker, 1991. The Council on Foundations, Washington, D.C. $8.

Trends in Family Foundation Governance, Staffing, and Management. Council on Foundations, 1993. Washington, D.C. $10.

The Rockefeller, Mellon, and Mott families do it. So does former junk-bond dealer Michael Milken. And so does Stanley Lopata of St. Louis. Day to day, fathers and sons, daughters and cousins oversee the distribution of hundreds of thousands, often millions, of dollars through foundations formed by family leaders. Some support education and medical research; others, social programs or the arts or a customized package of causes. To many who run family businesses, forming a foundation is a way to do some good with a share of the company profits that would otherwise be appropriated by the IRS.

Family foundations come in all spheres of interest, operating philosophies, and sizes: from the David and Lucile Packard Foundation in Los Altos, California, which will soon be worth $2 billion, to the Lopata Foundation in St. Louis, which in 1988 made some grants of as little as ten dollars. The Foundations of the Milken Families, headquartered in New York City (untouched by the insider trading charges facing brother Mike), have distributed $45 million since 1982.

The great majority of family foundations have no professional staff, give only in their home area, and do not solicit or even accept grant proposals. Most are begun by family heads who want to formalize their philanthropy or create a structure for giving by future generations. A foundation also clearly distinguishes the management and agenda of a family's philanthropy from the management and agenda of the family's business.

For families who give modestly, foundations offer little tax-deduction advantage over simple personal donations. For individuals who plan to contribute tens of thousands of dollars or more a year, however, or who wish to set aside company profits for social works, a foundation holds one great advantage: A large sum of money can be given to the foundation at any single moment, and a deduction taken for all of it. The money can then be distributed gradually over years to come.

Thus there are key moments in the life of a family business when starting a foundation has a major payoff. If a business has a banner year, or is sold at a considerable profit, a portion of the money can be sheltered from tax, if used to establish a foundation. The same strategy would apply for family members who receive a large inheritance, or money from an estate.

Some financial analysts have considered the establishment of a foundation a less attractive option since the federal Tax Reform Act of 1969. In that year Congress, angered by abuses of the foundation's nonprofit tax status, tightened restrictions on how foundations dispense their assets, and began taxing an institution's investment income as well. The formation of foundations dropped off substantially.

But in recent years an increasing number of foundations have sprung up, with family foundations leading the way. A recent survey of several hundred private (as distinct from corporate and community) foundations, conducted by the Council on Foundations in Washington, D.C., revealed that 62 percent of them have two or more family members on the board of directors, and that, on 40 percent of those boards, relatives constitute a majority.

Based on the survey and her own observations, the Council's vice-president for research, Elizabeth Boris, estimates that among the 23,000 private U.S. foundations, three out of tenare family controlled — a great many of which are small.

Part of the foundation's resurrection can be attributed to a series of recent tax acts, particularly provisions of the Tax Reform Act of 1984, which expanded certain tax deduction limits and eased some of the legal strictures imposed in the dark days of 1969.

Today, the IRS allows up to 30 percent of individual income, or 20 percent of appreciated property, to be donated tax-free to start or sustain a private foundation. The foundation must then pay a federal excise tax of 1 to 2 percent on the annual net income from the investment of its assets. The rate of payout is also regulated: Each year foundations must donate at least 5 percent of their assets.

Tax advantages aside, starting a foundation is particularly appealing to families whose traditions, heritage, or sense of social responsibility impel them toward altruism. Another, perhaps equally compelling motive for endowing a foundation was best described by a Northeastern family patriarch: "vanity, vanity, and vanity."

Even if there were no tax incentives, families would still form foundations, maintains Curtis Meadows, president of the $424-million Meadows Foundation of Dallas. "But since there is a tax incentive, there's even more motivation to provide targeted philanthropy. Better that," he says, "than to send your dollars straight to the U.S. Treasury and let the federal government decide how to distribute them."

How much does it take for a foundation to have an impact on society? Not a Rockefeller-sized bankroll. A million dollars in assets can enable a foundation to pursue a few serious interests effectively. Experts agree that successful grant-making depends less on the amount given, than on how it is targeted. A little seed money, given to a capable organization at a critical juncture, can produce good works beyond the donor's dreams.

Such has been the experience of New York City's highly-regarded Albert Kunstadter Family Foundation. Kunstadter's $200,000 a year in grants (almost a tenth of its assets) is spread judiciously among arts and education groups and nongovernment organizations dealing with international issues. Says Geraldine Kunstadter, wife of the man whose grandfather provided the endowment, "We have learned to use our money wisely."

Other foundations choose to give to the same causes regularly. A typical member of this group is the Shoenberg Foundation in St. Louis, established in 1955 by the late Sydney M. Shoenberg (whose father was a cofounder of the nationwide May department store chain), and currently operated by two of Sydney's sons and two business associates. The foundation gives about $500,000 a year to what Secretary-Treasurer William W. Ross readily acknowledges are "always pretty much the same organizations: the Jewish Hospital of St. Louis, United Way, Missouri Botanical Gardens, and so on." Proposals from grant-seekers are not exactly encouraged. Says Ross, with disarming frankness, "I tell people who call: 'Don't send me anything. You'll just be wasting the postage."'

An increasing number of family foundations, however, do things very differently from the Shoenberg model. They may not have much money to hand out, but as innovators, they get more bang for their bucks. Often in the forefront of social activism, they accept and may even solicit proposals, and spend many hours making "site visits" to judge the worthiness of applicants.

An outstanding example, focusing on local causes, is the $10 million Wieboldt Foundation in Chicago. Some two-thirds of the $570,000 it grants each year goes to local, low-income, minority organizations. Of the foundation's 13 directors, six are from outside the family, some representing the communities to which the grants are given.

"There was some apprehension about bringing in outsiders," says Anita (Onnie) Darrow, a Wieboldt, who at 69 serves as board president. "But we just told everyone they were joining the 'Cousin's Club,' and they've worked out very well."

By contrast, the Kunstadters' relatively modest amount of grant money flows across the Northeast and even into the Third World. And the $3.3 million Bert and Mary Meyer Foundation of Orlando, Florida, operates throughout the Southeast. Under the direction of the Meyers' daughter, Barbara Portee, the foundation maintains what Portee calls "a clear focus on rural community organizing, that is, efforts to make democracy really work."

Even foundations whose names may imply conservative spending may be quite venturesome. The $3 million Lawrence Welk Foundation of Santa Monica, California, for example, grants $300,000 a year to groups aiding the homeless, the frail and elderly, abused children, and child drug addicts. Welk's daughter, Shirley Fredricks, turned the then-unfocused foundation in those directions when she took over as executive director a decade ago. Her proudest achievement: getting all ten of the next generation — without twisting a single arm — to serve on either the senior or adjunct board.

An active role in a foundation can provide for continued personal growth for family members, ranging from retired patriarchs and matriarchs to their nonworking sons and daughters. "Getting involved in the Mary Reynolds Babcock Foundation made a tremendous difference to me," says Katharine B. Mountcastle, a daughter of the founder and a director of the foundation, based in Winston-Salem, North Carolina. "I was a homemaker with four children and no career, a gal out of the Fifties. The foundation changed that."

Inevitably, however, the establishment of a family foundation raises problems. Having to say no to applicants is a comparatively small one. Says Geraldine Kundstader, "People call to browbeat us. They say, We fall right within your guidelines. How can you not give us a grant?"'

More difficult is the tension resulting from arguments among relatives and other board members over philanthropic priorities and goals, and the debate over how punctiliously a board ought to adhere to a deceased founder's values.

Finally, someone is likely to demand, "Whose money is it anyway?" (A family trustee of Dallas's Meadows Foundation has declared publicly that Meadows' assets are "a public trust," but few officers of family foundations would subscribe to that thesis.)

For every extended family that has been brought together on behalf of a foundation, another has split into separate philanthropic camps. Oklahoma City's Kerr Foundation, for example, was divided into four entities to serve the interests of four children. The renowned MacArthur family of Chicago set up two very different foundations. The larger John D. and Catherine T. MacArthur Foundation is famous for its "genius" grants to promising individuals in the humanities, sciences, and literature. The J. Roderick MacArthur Foundation is more modestly endowed and is active in human rights causes.

Then there is the matter of passing the torch. Just like family businesses, family foundations that fail to provide for succession inevitably go the way of the dodo. Sometimes they wind up inthe hands of bank trustees. The Council on Foundations is concerned enough about foundation mortality that it has made succession planning a major topic of an upcoming conference.

One way to confront the problem of transition is to anticipate it by interesting heirs when they are young in the foundation's work. Onnie Darrow, who has helped guide the Weiboldt Foundation for more than 20 years, recalls that when she was growing up her family would "sit around the dining room table and talk about what the foundation was doing with its money."

That's what it's all about, Curtis Meadows says. "The foundation is an exceptional opportunity for the family to do important work — together — and to promote the family's values by helping humanity."

—R.M.W

Getting Started

What's the first step in the process of starting a foundation? Hiring an accountant? Drafting some bylaws?

No, say those who have gone through the experience. "You need at the outset an adviser who can help you decide what you want your foundation to accomplish," says Barbara Portee, founder and president of the Bert and Mary Meyer Foundation of Orlando, Florida.

Once you've taken that important first step, then you'll be ready for an accountant or lawyer experienced in nonprofit tax matters. With an expert's help, you can work your way through a series of questions, starting with the major one: whether to organize as a nonprofit charitable trust or a not-for-profit corporation. Under most circumstances the tax consequences are similar, but the two structures offer different advantages.

Trusts are less formal, in both formation and operation. They involve few or no requirements for regular meetings, minutes, officers, and the like. The not-for-profit corporation operates much like its for-profit cousin and is regulated accordingly.

That can be a plus. The corporation provides much greater protection from personal liability for its directors; permits donors to maintain control while limiting their own day-to-day involvement; and affords greater adaptability to changing circumstances.

Regardless of the form chosen, foundation activities are regulated by state law, so an adviser should be chosen who is well versed in your state's legal particulars. The legal process begins by submitting forms to various entities in your state, which often clear within 30 days. At the federal level, you must apply for tax-exempt status, and may end up waiting up to six months for approval. Once underway, all foundations must file annual tax returns, and are subject to IRS and state audits.

Another major decision involves selecting a board of trustees or directors, and determining terms of service that will encourage both continuity and gradual change in the board's composition, In choosing the board, you'll have to decide whether to include nonfamily members ("out-laws as distinct from in-laws," in one adviser's words).

Other important decisions include the precise topical and geographical scope of the foundation's activities, and the type of support you want to give (money for bricks and mortar? For scholarship and research? Loans as well as grants?). Will you entertain grant proposals? And do you need a professional staff? Few foundations have or need one, but one or two clerical assistants may substantially reduce your workload.

An excellent source of assistance for families thinking about establishing a foundation is the book First Steps in Starting a Foundation. It can be obtained for $30 from the Council on Foundations, 1828 L St. NW, Suite 300, Washington, D.C., 20015; telephone 202-466-6512.

—R.M.W