What Is a Family Foundation?

Large estates interested in philanthropy may consider establishing a private family foundation. This type of organization is founded with one or several large donations from a private estate. A family foundation is a non-profit organization with a mission of donating money to recognized charities. Reasons for establishing a private family foundation include creating a family legacy, evading large capital gains taxes, and pursuing philanthropic goals, among others.

When a person’s private wealth become significant, estate planning is vital to sustaining that wealth. Estate planning refers to those measures taken which help preserve a person or family’s assets and income. A great deal of money can be lost to estate taxes upon the death of a person of wealth. In the US, significant so-called “death taxes” give that money to the federal government. Before dying, a person should plan their estate’s assets and income to preserve the most wealth. In addition, assets which have greatly appreciated in value can be donated to a non-profit, and the resulting capital gains can benefit the foundation instead of being taxable income for the asset owner.

Under current US tax codes, donations made to non-profits are tax deductible, meaning that a person can donate to a private family foundation and then deduct that amount from his or her taxable income. This creates a way for a person of wealth to protect his or her assets while at the same time creating a family legacy. The foundation is usually named for the person donating the most money to it. For example, the Bill and Melinda Gates Foundation is a private family foundation named for Bill and Melinda Gates. They have donated enough money to establish an ongoing trust which donates a significant amount of money to non-profits each year, and they have developed a legacy with their name and donations.

A family foundation can also be a way to involve family members in charitable work. According to US tax laws, a private family foundation only has to disburse 5% of its annual proceeds to charitable work. The rest of the money can pay salaries for friends and family members to make philanthropic efforts their primary occupation. They have to prove, however, that they are earning this money by keeping records of all their charitable work.

The person in charge of a family foundation is usually the person making the donations, an executive director appointed by that person, or a board of directors. If there is a board of directors, there must be a chairperson of the board who will lead the others in monitoring assets and controlling who receives the donations. By appointing the right person or persons in these jobs, the owner of an estate can maintain some control over the non-profits receiving the charitable funds.