Should you start a family foundation?

By Bennett Voyles

The pros and cons of joining philanthropy's big leagues.

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

National Center for Family Philanthropy
1818 N St., N.W., Suite 300
Washington, DC 20036
(202) 293-3424
Fax: (202) 293-3395
  The Foundation Center
79 Fifth Ave.
New York, NY 10003
(212) 620-4230
Fax: (212) 691-1828


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Summer 2004

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