March 30, 2010
If you’re interested in helping your clients pursue their philanthropic interests through a family foundation, sharing the following tips can help them avoid administrative headaches:
1. The money is there to be spent. To avoid taxes for under-distribution, a private foundation must generally distribute at least 5 percent of the value of its investment assets (minus fees and investment taxes) every year. “It’s critical for private foundations to calculate the annual distribution amount as early as possible and monitor grant distributions throughout the year,” advises Briskin. “Many foundations scramble to make contributions in the last weeks of the year to avoid shortfalls.”
A foundation that misses its target may have to pay higher taxes on investment income, although Briskin notes that the IRS gives some flexibility for foundations missing the 5 percent distribution to make up the difference by contributing more than 5 percent in the following year.
During the first five years of operation, all private foundations must pay a 2-percent investment income tax directly from the foundation’s assets. With an established a five-year track record of distributing at least 5 percent of assets annually, however, the tax decreases to 1 percent.
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Establish proper governance. The family’s excitement for beginning their charitable work can cause them to overlook the importance of setting up governance structures, says John B. Smith, principal at Cambridge Consulting, a Cambridge, Massachusetts management consulting firm focused on philanthropy.“Effective grant-making depends on a clearly established mission, guidelines for operations, and processes to ensure the ethical conduct of the foundation and compliance with fiduciary duties.”
In fact, just as investments are evaluated in an ongoing manner, it’s also advisable to create a governance committee that will monitor a foundation’s structure, leadership, and practice. To help families act as responsible stewards of their foundation resources, the Council on Foundations offers Stewardship Principles for Family Foundations, which outlines best practices to help foundations strive for excellence in governance and ethics.
- Narrow your charitable focus. Finding the right mission entails more than identifying an interest, says Andrew Bangser, president of Foundation Source, a provider of back-office, technology, and support services designed to automate and simplify foundation management. “An effective mission statement is one you have the scale to accomplish,” he says. “Biting off the right size chunk of the problem is they key in being able to make a difference.” He once worked with a client who was interested in the environment. He brought in an environmental consultant to the Clinton White House, met with family and board, and decided the foundation could be the most effective focusing on state environmental regulations.
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