The Family Foundation Makes A Comeback

By Roger M. Williams

You've done well; maybe it's time to do some good. Especially since the IRS has restored a number of tax advantages that make the foundation option attractive again. But you have to pick the right moment.

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."


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.


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