Financial Planning Insights

Charitable Giving Series: Part IV of VI on Using Private Foundations to Build a Family Culture of Philanthropy

By Joe Maier and Bob Schneider | Johnson Financial Group • November 23, 2020

5 minute read time

SUMMARY

While direct giving or donor advised funds oftentimes achieve a family mission focused on philanthropy, there are situations where the charitable goals can only be achieved by building a “family philanthropy business.” That is the essence of a private foundation. In part four of a six-part series on charitable giving, Director of Wealth Strategy, Joe Maier, and Wealth Advisor, Bob Schneider, explore what a private foundation is and how it can be used as a vehicle to address a unique charitable mission.

This is part four of our six-part series on charitable giving. In this article, we focus on why people use private foundations to execute their charitable mission.

In our last article, we learned why Dean and Jessica Howard would want to use donor advised funds, which let them maximize the impact of their giving by “decoupling” their charitable contribution (and tax deduction) from their charitable grants. Using a donor advised fund, the Howards could make a large charitable contribution in the year they sold their business without having to make a correspondingly large one-time gift to the hospital (or other charities). Instead, they could contribute funds as they are needed, and thereby make a greater philanthropic impact.

But what if the Howards charitable mission evolves? And when would that evolution lead to the use of a private foundation?

What is a Private Foundation?

By law, a private foundation is a charitable organization that does not qualify as a public charity. The implication of that “failure” is that there are more restrictions on contributions, lower deduction limits and more operating restrictions. Those restrictions certainly result in higher administration and compliance costs and often result in a higher cost of giving (and thereby, less economic charitable impact).

Given these constraints, if someone’s charitable purpose can be met by direct giving or a donor advised fund, those vehicles should be chosen. But what if they cannot?

Private Foundations as Vehicles to Address Unique Charitable Missions

As highlighted in previous articles, direct giving and donor advised funds are powerful giving tools when a charitable mission can be accomplished through the operations of a public charity. If an alumni of the University of Wisconsin wants to help the school, a direct gift does that perfectly. If a donor wants to fight cruelty to animals, a gift to the SCPA effectively accomplishes that purpose. But what if no charity’s purpose aligns with the donor’s?

For example, what if the Howards find that no charity is focused on the eradication of pediatric neuroblastoma? In that situation, no charitable gift, either direct or through a donor advised fund, furthers the Howards’ charitable purpose.

In this situation, a private foundation can be created to achieve that purpose. The private foundation can directly fund research designed to eliminate a disease. It is this exact reason one of the most well-known foundations of all time, Livestrong, was created.

Lance Armstrong and his advisers became frustrated with the lack of progress and focus on cancer research in the American Cancer Society and other similar charities and decided to make a more direct impact on cancer eradication. So, one reason the Howards might create a private foundation is to most directly, and most effectively, attack pediatric neuroblastoma.

Achieving a Charitably Focused Family Mission

Another reason that the Howards might want to create a private foundation is to further a family mission that is focused on philanthropy. While direct giving or donor advised funds oftentimes achieve that family mission, there are situations where the charitable goals can only be achieved by building a “family philanthropy business.” That is the essence of a private foundation.

For example, let’s imagine the Howards’ children getting older, getting consulted on family mission and joining the family passion to eradicate childhood cancer, particularly pediatric neuroblastoma. It becomes such a family passion that the Howard family knows more about the disease, the research and its treatment than almost anyone in the world.

The Howard family cares so much about this cause that it is willing to use a substantial portion of the family assets to fight this disease. In this situation, this family’s passion can be best met by building a Howard family business dedicated to the eradication of pediatric neuroblastoma. That business, wherein the Howards can develop the strategy and directly oversee the execution, can only be achieved with a private foundation. The power of the Howard family purpose and passion make the challenges and costs of a private foundation worth it for them.

Conclusion

When one runs an internet search on charitable giving techniques, unfortunately the results will be replete with advocacy articles: why one type of giving (direct, donor advised fund, private foundation) is superior to the others. But the Howards show us the fallacy of that mindset.

At different times, each giving technique was right for the Howards, each different strategy best accomplished their charitable mission at that time. Charitable giving is not a one size fits all world; it is like all strategic planning. First, uncover and document the purpose. Then, figure out how to best accomplish that purpose.

Across these first four articles in our six-part series, we focused on the Howards, a family dedicated to using a portion of their wealth to accomplish a charitable purpose. But what about people who have no charitable inclinations? People who solely want their wealth utilized to maximize their independence and legacy goals. Is there a place for charitable planning for them? As we will see in articles five and six, we will learn, in the right situation, there is. In other words, they can give more in order to keep more.

Charitable Giving Series

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Start with “Why”: Choosing the Right Approach to Charitable Giving

Given the significant interest in philanthropy, it’s no surprise that the internet has plenty of questionable material on the subject—advising and educating (and often advocating) about direct giving vs. donor-advised funds vs. private foundations. These articles focus on the how, including costs, control, tax benefits, ongoing burden and legacy.

READ MORE about choosing the right approach for charitable giving.
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Direct Giving: Choosing the Right Charitable Giving Approach

This article continues a our six-part series on charitable giving. In the first installment , we explained the importance of establishing the why before focusing on the how. Now, we’ll take our first step into the how, with a discussion on the simplest method: direct giving.

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Using Donor Advised Funds to Make a Philanthropic Impact

This is the third article in a six-part series on charitable giving. In this article we explore when a charitable mission is best met by contributing to a donor advised fund.

READ MORE more about using donor advised funds to make a philanthropic impact.
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Using Private Foundations to Build a Family Culture of Philanthropy

This is part four of our six-part series on charitable giving. In this article, we focus on why people use private foundations to execute their charitable mission.

READ MORE about Using Private Foundations to Build a Family Culture of Philanthropy.
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Charitable Giving Designed to Enhance Non-Charitable Goals: Understanding Testamentary Charitable Lead Trusts

This is the fifth part of a six-part series on charitable giving. The previous articles all focused on the Howards, a couple that had a charitable mission inspired by their son James’ childhood cancer. The Howards were prototypical charitable donors; their philanthropy was driven by a cause, and they used the tax code to enhance their impact.

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Using Charitable Remainder Trusts to Defer Taxes and Maximize Wealth

This is the sixth and final part of our charitable giving series. In our last article , we met the Joneses, a successful couple with a significant net worth. Their priorities are exclusively focused on legacy. However, they have such a disdain for paying taxes, they are willing to adjust their goals to avoid tax.

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by Joe Maier

Joe has extensive experience helping high‐net worth individuals, family offices, business owners and corporate executives meet their wealth and legacy goals. His areas of specific interest and skill include business succession planning, financial and estate planning, and wealth transfer strategies.

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by Bob Schneider

Bob Schneider specializes in providing clients with the educational information and tools necessary to make informed decisions regarding their financial planning goals. He uses his financial planning experience to help individuals and families plan for and enjoy their retirement years.

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