So You Want to Be a Family Philanthropist: Choosing Your Giving Vehicle

Editor’s Note: Individuals and families that are exploring options for taking a more organized approach to their philanthropy have a multitude of choices in today’s rapidly developing philanthropy marketplace. Here we explore the features of two popular vehicles for donors: donor advised funds (DAF) and the private family foundations. For more insights, check out the replay of our August 2014 webinar on this topic featuring author and consultant Julia Kittross, as well as donors Sue Miller and Kathy Edwards. Some families also find using both vehicles enables them to maximize the benefits of each. For more on this topic, watch the replay of our August 2013 webinar on family foundations and community foundations collaborating in unique ways.

Adapted from So You Want to Be a Philanthropist: How to Choose, Set Up and Manage a Successful Family Foundation, by Julia A. Kittross; available on Amazon.com.

There are two vehicles that most donors consider when they are interested in involving their families in shared, multi-generational philanthropy: establishing a donor advised fund (DAF) at a community foundation or through a financial institution, or creating a private foundation. This article introduces the key questions donors should ask when choosing between these two common options.

Before you choose your giving structure, be sure you try putting your toe in the water of organized giving to see if you like it. The easiest way is to join a network of individuals giving jointly – either a giving circle, a public foundation such as Social Venture Partners, a Women’s fund, or simply write more targeted or larger personal checks. The personal check feels just as good, and it may do just as much good as a check drawn on a private foundation account or from a DAF.

If you enjoy this introduction to grantmaking, ask yourself:

“Is this enough? Or do I want to do more?”

Virginia Esposito of the National Center for Family Philanthropy crafted many of the following questions that should be answered before you choose which giving vehicle is right for you.

OK, just what is your goal?

Answer this: What do you want to accomplish through your organized philanthropy? Look over the suggestions below. One or more than one may fit you, or you may have thought of other reasons – there are many!

To encourage your children to learn about issues and problems so they gain a deeper understanding of the world around them?
To make change in a system that seems broken?
To ease immediate suffering?
To strengthen nonprofits so they can better achieve their goals?
To provide yourself, spouse, child, or grandchild with an opportunity to enter a rewarding profession and manage the foundation?
To encourage your friends, family, and business colleagues to give more or to give to your cause?
To honor your parents or someone else by supporting what they cared for in their day?
To ensure your favorite nonprofit is sufficiently resourced for a long and fruitful life with a rainy day or an innovation fund?
To see your family’s name on the local theater building or university library?
To engage your family in a joint endeavor to keep connections strong?

Pick your reasons with care, because your choices here will affect your philanthropy in significant ways. Form will follow function — what structure you should use will become more obvious the clearer you are with yourself about your goals.

Do you want other family members to be involved?

One of the typical reasons you may hear people say why they started their family’s foundation was to “bring their family together.” May I be so bold as to suggest six “do not” rules about starting a family foundation?

Do not expect your foundation to automatically make your children like each other.
Do not expect your foundation to automatically make you and your children get along.
Do not expect your foundation to prevent your child from becoming a ski bum or a starving artist.
Do not expect your foundation to allow you and your children or grandchildren (or your parents or siblings, for that matter) to suddenly behave and communicate at all times like adults.
Do not expect your children and grandchildren to be interested in your causes or to continue funding the exact causes you cared about after you’re gone.
Do not expect your brother to suddenly respect you.

So if you’ve been leaning toward your children being involved, ask yourself once, twice, or more times:

Do you really, truly want family members involved?

The Cedarmere Foundation family Bringing on the kids is more complex than saying, “Hey, son, I’ve created a DAF or family foundation and I want you to be an advisor or trustee.” Think ahead about what this means. Don’t do what a past client of mine did: after appointing two young adult children to the family foundation board, the president (their dad) was puzzled that they expressed some reticence. He didn’t understand that 1) it would have been nice to ask them if they wanted to be on the board, and 2) scheduling the monthly board meetings at 9:00 am on a weekday made it extremely difficult for his working children to attend.

A warning: The next generation is extremely busy. They are establishing careers, going to school, getting married, having babies. Donors are often at a point in their lives where they have time to commit to hobbies, causes, and second careers. Young people just don’t always have this time. Allow the kids to opt in and out depending on their life circumstances and schedule meetings in ways that make it easy for them to participate.

If working collaboratively is important to you, both foundations and donor advised funds can join with others in learning and grantmaking activities, such as pooled funds or as members of regional associations of grantmakers.

How much time and effort do you want to put into philanthropy?

Unless you plan to give gifts to the same dozen nonprofits a year, you will be spending some time at this endeavor. You will review nonprofits and learn what those you support accomplished each year. If you have a private foundation, you’ll have much more to do.

You may decide you wish to spend a lot of time practicing philanthropy. Going on “site visits,” or meeting with nonprofit leaders at their office or place where they provide services. Learning about “best practices” in the fields you fund. Teaching your children or grandchildren about philanthropy. Determining how to best evaluate your efforts. Sharing your results through reports, a website, or attending grantmaker gatherings. Investing the foundation’s assets in projects that build and improve the community – this is called mission-related investing (MRI). And there are many more activities you can do as a philanthropist.

So answer this:

How much time in a week or a month do you wish to dedicate to your philanthropic activities?

Two hours a week? Twenty hours a month? Are you making this your second career or enjoyable hobby? Or is this an annual endeavor with your family designed to do some good and feel good but not take too much time except for that end-of-year gathering? By determining this, you will know better how to focus your giving, decide on the size of grants you wish to make, determine whether you or someone else in your family or someone you hire will take on the administration of the foundation, and decide which giving structure to choose in the first place.

If you know you don’t want to spend a significant amount of time on your philanthropy, be prepared to outsource or hire staff for much of the work, or reserve those dollars for philanthropy and consider a Donor Advised Fund.

How much money do you plan to commit to philanthropy?

You may hear from advisers of various sorts that you need to have at least $1 million – or $10 or $50 million – to launch a private foundation. Bull pucky. The amount of money is much less important than your answer to what you want to accomplish. There are, however, economies of scale, and you should consider how willing you are to pay for the administrative resources needed to manage a foundation.

You may only have $25,000 now to invest in philanthropy, but at your death a portion of your estate will increase that significantly. Your main goal may be to provide your children an opportunity to build a career in philanthropy. In either case, a private foundation may be a fine option even if you haven’t tens or hundreds of millions.

What level of start up and ongoing administration costs are you comfortable with?

When you start a private foundation, I can think of at least a dozen steps right off the bat that take time and money – and an attorney and CPA. You have to file for charitable status from the IRS. Sign checks and letters. Keep track of your grants over time. File your annual tax return. Oversee your investment returns. Hold board or trustee meetings. With a DAF, you write a check and make a recommendation for your grants. Finis.

There is no doubt about it. A private foundation takes more work and costs more to set up and run than a donor advised fund. In addition, private foundations are required by the IRS to distribute 6-7% of their endowment annually, including excise taxes, while DAFs typically have no such annual requirements.

Do you want your giving to be anonymous?

If so, this is another slam dunk for the DAF. By law, private foundations must file public tax returns listing operating costs, grants made, consultants and staff paid over a certain threshold, investments and trustees. If you want your gifts to be anonymous, then create a donor advised fund and don’t name it after your family.

Remember that there are good reasons to be public with your giving – such as influencing others to give to the causes you are passionate about.

Are you in this for the long haul?

in our handssmllr Is gifting in a focused manner something you want to do only during your lifetime? For the next ten years? Or do you want your children or others, family or not, to carry on your philanthropic purpose or create their own giving legacy?

If your interest is to focus your giving during your lifetime (or soon thereafter), think twice before creating a private foundation. Starting a DAF would most likely be the better choice, if only for efficiency. If your answer is to create a philanthropic entity to last into multiple generations, a private foundation should be considered.

Which grantmaking strategies appeal to you?

Learning ahead of time about the variety of grantmaking strategies you can use may also help you determine which giving structure might work best.

There are many grantmaking strategies: capacity building, bricks and mortar, collaborating, start-up, convening, supporting leaders, focusing on small organizations, replication of successful programs, funding advocacy, building markets, and using requests for proposals. Both DAFs and private foundations can use most of these strategies. However a few may be easier to use in a private foundation. Generally, the more complex, the less likely a DAF will be able to serve your purpose, although that can vary according to the size, age, and sophistication of the DAF’s host.

Note: scholarships are more easily distributed from within a community foundation, a college or university, or other entity designed specifically to manage them, since the IRS requires up-front approval of scholarship rules within a private foundation.

What legacy do you want to leave?

If you know you want to leave a legacy in honor of your parents, for instance, a private foundation may allow this to occur more easily, since your gifts can both reflect their name as well as their values or causes. Gifts from DAFs are made in that donor advised fund’s name, but the check will legally come from the host agency, and some nonprofits may publicly recognize that gift in that host’s name.

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As a philanthropy consultant, I’m mostly called in to work with family foundations that are struggling and may have made the wrong giving vehicle choice from the start. If donors would answer these nine questions before they establish a private foundation or a DAF, I’d spend much more and more rewarding time being an advocate for joy and efficacy in my clients’ philanthropy.

For additional advice and insights, view the replay of NCFP’s recent webinar on this topic featuring the stories of Sue Miller, co-founder of the John and Susan Miller Family Fund and Kathy Edwards, co-founder and president of the Cedarmere Foundation. In addition, see the following additional NCFP documents and resources: