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By Anna Melissa Price of Jenkins Fenstermaker, PLLC on 12/10/2020
The Fundamentals of Family Foundations

Family foundations are a remarkable but often overlooked charitable giving option. Families wishing to put endowment-level assets to use for charitable purposes can realize tax savings and retain complete control in defining and pursuing philanthropic efforts. While strict federal and state regulations govern the establishment and operation of a family foundation, this means of charitable giving allows the family continuing control to define and direct its benevolences.

Many families of means in West Virginia (WV), Kentucky (KY), and Ohio (OH) give to their community through the establishment and operation of a family foundation. This charitable estate planning option vests continuing authority in the family to direct its donations for years to come.

What Are Family Foundations?

A family foundation is a type of private foundation, a non-profit legal entity established and funded by a family to serve as a tool for philanthropic giving. Family members of the person or persons who establish a foundation often serve as officers, directors, or employees of the foundation. A family foundation is usually created as a trust or a corporation, each having its own benefits and drawbacks.

Family foundations are independent legal entities that are regulated at both the federal and state level. State law determines the requirements for creating the trust or corporation, and the Internal Revenue Service (IRS) determines whether the foundation’s creation and activities qualify it as a non-profit entity under Internal Revenue Code § 501(c)(3). Its tax-advantaged status subjects the foundation to ongoing regulation to retain its status as a 501(c)(3) organization.

Serious contemplation and planning necessarily precede the creation of a family charitable foundation. With the guidance of an experienced family foundation lawyer in WV, KY, or OH, you can establish a private foundation to meet your charitable giving goals for generations to come.

Steps for Creating a Family Foundation

Just as you would not open a business without a business plan, you should have a firm idea of your charitable goals and how you intend to reach them before creating a family foundation. Preliminary business planning requires consideration of questions like these:

  • Who do we seek to benefit with our charitable giving?
  • What giving devices will we use to achieve our philanthropic goals (e.g., grants, scholarships, loans, charitable donations)?
  • Who will manage the day-to-day foundation operations?
  • Will a paid staff be necessary/affordable?
  • Who will make the decisions regarding charitable undertakings?
  • How will the family foundation be funded initially and will it accept future contributions?

Once you’ve created a business plan for your foundation, you’re ready to begin the legal steps to create the family foundation entity.

Creating a family foundation requires careful compliance with strict federal and state laws. Although the IRS must certify the foundation’s tax-exempt status, you must first create the trust or non-profit corporation that is to become your family foundation.

State law often has fewer formal requirements for establishing a trust than a non-profit corporation. Using the trust form also eliminates the need for regular meetings, minutes, and regulatory filings required of corporations. However, trusts are less malleable, sometimes requiring court approval to modify the trust documents to formalize a different charitable direction. A corporation is a formal entity burdened by the statutory requirements just mentioned, but it is also easier to adapt to a new giving course or focus.

After you have established a trust or corporation, you must obtain IRS recognition as a tax-exempt organization under IRC § 501(c)(3). This status exempts the foundation from paying income tax and allows donors to take tax deductions for their contributions. Generally, this means filing IRS Form 1023.

How Family Foundations Work

Once your foundation is formally established, it can be funded with cash, public stock, privately held stock, real estate, or other assets under the family’s control. The organization may be classified as an operating foundation, one which carries out its own charitable activities, or non-operating, which makes grants to other charitable organizations but does not carry out its own programs.

Whether a foundation is operating or non-operating has a significant impact on how it spends its charitable gifts. Operating foundations must spend at least 85 percent of the lesser of their adjusted net income or minimum investment return directly on the activities of their charitable focus. In other words, these organizations may spend no more than 15 percent on overhead such as staffing and administrative costs.

Because of this limitation, the amount of capital in a family foundation has a real impact on whether the organization can be established as operating or non-operating. This, in turn, drives organizational decisions about office space, staffing, and other administrative matters.

Pros and Cons of Family Foundations

One of the main benefits of a family foundation is the opportunity this device gives the family to control and directly participate in the chosen philanthropic endeavors. The family can create a legacy that focuses on the issues or conditions important to them. Multiple generations of the family can work together, passing on the values of the foundation’s founder or founders to younger generations while teaching them real-world management, philanthropic, and leadership skills.

However, with great power comes great responsibility. For the family foundation, that translates to compliance with the tax code regarding non-profit and foundation status, the need for legal counsel to form the corporation or draft trust documents, and an ongoing responsibility to manage—or pay someone else to manage—the foundation’s affairs. A family foundation is a long-term commitment with ongoing obligations for present and future generations.

Family Foundation Red Flags

The regulation of family foundations extends beyond maintaining non-profit status as a 501(c)(3) organization. First and foremost, the strict tax regulations prohibit conflicts of interest. The tax code strictly prohibits self-dealing between the foundation and statutorily defined disqualified persons. The federal tax code defines disqualified persons to include anyone in one of the following roles related to the foundation:

  • Substantial contributors to the foundation;
  • Family members;
  • Officers;
  • Managers; and
  • Affiliated corporations and their family members

The code defines self-dealing to include the following actions between a foundation and a disqualified person:

  • Paying a foundation manager or officer compensation that exceeds the rate for a comparable position;
  • Entering into a lease or selling something to the foundation or disqualified person;
  • Granting a loan;
  • Footing the cost of travel by disqualified persons for foundation business (with the exception of reasonable expenses for the foundation manager);
  • Hiring family members unless the roles are necessary to foundation business; and
  • Providing accommodations (like office space), services, or goods to disqualified persons

To avoid these and other legal snags, consult an experienced family foundation attorney before establishing the foundation and throughout its operation. Compliance requires attention to areas like these:

  • Maintaining records of documentation for creating and operating a corporation or establishing a trust;
  • Obtaining from the IRS and maintaining tax-exempt status as a private foundation;
  • Observing special tax rules governing family foundations;
  • Creating, maintaining, and following a conflict of interest policy; and
  • Following state laws on matters such as reporting requirements

For more information about various filing requirements, see the Council for Foundation’s Tax Filing, Audits, and Public Disclosure Requirements.

Family Foundations in the WV-OH-KY Tristate Area

Family foundations provide much-needed assistance in a wide array of matters. From the funding of scientific research to needs-based scholarships, these family benevolences help fund medical breakthroughs or lift individuals out of poverty. Total annual giving by grant-awarding organizations such as family foundations in West Virginia alone exceeds $23 million.

Examples of family foundations that operate in the tristate area include the following:

  • The Mollohan Foundation, which provides scholarships, grants, and loans to further educational, scientific, and charitable programs in West Virginia;
  • The Carter Family Memorial Fund, which donates its income to Alderson Broaddus College At Phillipi and University of Charleston-Beckley;
  • The Levin Family Foundation, which supports agencies in and around Dayton, Ohio that feed, clothe, educate, and provide health care; and
  • The Marksbury Family Foundation, which funds child development and child and adult educational programs

Your Family Foundation Attorney Can Be Key to Philanthropic Success

Choosing the right vehicle to further your charitable goals and legacy requires serious contemplation and guidance from experienced counsel. Anna M. Price at Jenkins Fenstermaker, PLLC can help you determine whether a family foundation is the best vehicle to meet your charitable giving goals and maintain your foundation’s tax and state compliance. To consult with a knowledgeable family foundation attorney in WV, KY, or OH about family foundations, call Anna at (304) 523-2100 or complete this online contact form.