Why Do People Create Family Foundations?

While not legally defined, family foundations are generally understood to be private foundations guided by a particular family's wishes. Famous examples include the Bill & Melinda Gates Foundation, the Ford Foundation, and the Rockefeller Foundation. However, the wealth associated with these organizations is far beyond what is needed to start a private foundation. Family foundations, large and small, across the U.S. are working in all issue areas to improve communities and the world. Many are place-based - serving specific, often geographically bounded, communities. Giving by foundations has increased (even after inflation adjustment) in 9 of the last 10 years, indicating sustained and growing interest from the philanthropists who fund them.

The Advantages of Foundations 

Why give through a foundation? There are many reasons donors may feel that their giving is suited to the structure of a private foundation. Here are a few big ones: 

• Financial incentives: Private foundations are a legal structure defined by their charitable efforts. As such, they are privileged with certain tax exemptions. Indeed, there are several financial benefits to the foundation structure. 

• Expertise: Family foundations often hire relevant experts, ideally from the communities they serve, to make decisions on behalf of the family. In addition to the expansive information available to all givers, resources exist to help family foundations reach their full impact potential, including the National Center for Family Philanthropy. Family members are still involved with decision-making, but with the support of each other and relevant experts. 
• Beyond the check: Family foundations are ideally suited to create relationships with grantees and provide support beyond the financial. For example, foundations may employ a relationship officer to cultivate lasting and impactful relationships with organizations. Foundations may also hire individuals with technical expertise to support the logistical needs of nonprofits that cannot necessarily afford to bring in consultants or staff with specialized knowledge. This type of support can be transformational for nonprofits but is beyond what most individual donors can provide.
• Formal processes: For people who receive donation requests frequently, a foundation structure offers a way to politely defer giving decisions and stay focused on their giving priorities. Most family foundations carefully review grant requests with their guidelines and goals in mind. 
• Legacy: Many people feel that establishing a foundation will convey their values, cement their legacy, and encourage generosity in their families.

The Disadvantages of Foundations 

Private foundations enjoy privileges that individual givers do not have, but the privileges come at a price. 

• Initial investment: Getting a foundation up and running is similar to starting a business. Steps like creating the legal structure, hiring staff, creating a governing body, and much more are time-intensive. 
• Sustained effort: Once the foundation is off the ground, there are many ways to drive decision-making, including hiring experts outside the family and/or letting family members take on leadership roles. Members of the family, especially the founder, are generally expected to stay involved in the foundation and its decisions. A family foundation will require attention and care as long as it exists. 
• Regulation: Private foundations are subject to strict regulations and reporting requirements. Potential violations of their tax-exempt status may create legal problems with the IRS. It is essential that the legal restrictions on private foundations are thoroughly understood and incorporated into the organization’s practices.

Alternatives to Starting a Foundation

For some, the benefits of starting a new foundation outweigh the burdens it creates. Other people simply find that there is not a strong need for a new private foundation in the space they want to impact. Alternatives exist without some of the downsides (or benefits) of foundations. 

• Giving to another foundation: If a funder is concerned that the space they are interested in occupying has already been filled, it often makes sense to extend funds to an existing effort. The most famous example of this is Warren Buffett’s donations to the Bill & Melinda Gates Foundation. As of the end of 2022, Buffet has given $36 billion to the Gates Foundation, proving that this strategy is possible even at the highest donation levels. For small dollar amounts, the inconvenience of giving through another foundation (which may not be set up to accept outside donations) may not be worthwhile. 

• Giving through an intermediary: Intermediaries exist to connect donors to organizations doing important work on the ground. Intermediaries come in a wide variety of formats including donor-advised funds, giving circles, and fund aggregators. Intermediaries can do the same type of vetting that foundations do. An intermediary can be hands-on (like a giving circle) or fully hands-off (like a fund aggregator).

• Hiring a consultant: Hiring an expert in the field who can help match giving priorities to high-quality organizations is a great option for giving confidently. 

• DIY: With the availability of information on nonprofits available on websites like Charity Navigator, there is ample opportunity for donors to find the data and information needed to give with confidence. This option requires time and effort investment, but it can provide great results.