Frequently Asked Questions about Private Foundations

How long does it take to set up a foundation?

Completing all the paperwork to establish a family foundation takes approximately six months. If created in the trust form, the legal entity is complete when the trust agreement is signed. If created in the nonprofit corporation form, the entity's articles of incorporation must be submitted to the appropriate state authority for approval and stamping. Depending on the state, the process varies from one day to three or four weeks.  Once the creating document is complete, Form 1023 needs to be submitted to the appropriate IRS office to obtain Section 501(c)(3) status. On average, IRS review and approval takes six to nine months.

Is there a recommended minimum size?
The IRS estimates that there are at least 14,000 private foundations with assets of less than $100,000. Whether such a small foundation makes sense or not is another question to which there is no simple answer. Appropriate minimum size depends on several factors.  These factors include:

How much volunteer help is available? A number of issues arise here. Will a family member provide the legal assistance in establishing and operating the foundation? Will others volunteer to do the paperwork, answer the mail, write the checks, complete the tax return, submit estimated tax payments and serve on the governing board? The more volunteer and pro bono help available, the fewer staff required. But be sure to think through the long term. Will the same degree of volunteer help be there in ten years, 20 years or 50 years? The operating expenses will not go away.

Will the foundation depend on ongoing lifetime gifts? The size of the annual budget is more important than the size of the endowment. If the donor or family members intend to contribute frequently to the foundation to fund the grant-making and other expenses, the size of the endowment is basically unimportant. This "pass-through" approach is not uncommon, particularly when the donor expects to endow the foundation with significant assets at death. 

How long will the foundation last?  If ongoing gifts are not likely and a significant bequest is not designed, a small foundation endowment of $100,000 or more may still be effective, as long as the intent is to operate the foundation for a limited number of years paying out principal as well as income.  However, if the intent is for the foundation to be permanent, the amount of volunteer help available is minimal, and there are no ongoing contributions anticipated then what is a good rule for minimum size of the endowment?  For a non staffed family foundation with volunteer board members, a suggested minimum size is $1 million. The income from such an endowment should provide $50,000 to $55,000 for expenses and grants while still keeping the foundation's endowment even with inflation. Under this scenario, expenses should be in the $5,000 to $15,000 range, leaving most of the budget for grants.  However, if the intent is to hire a full-time executive director, the annual costs of salary, benefits and office expenses are likely to reach the $80,000 to $100,000 range. In this case, a suggested minimum size is much closer to $10 million, which provides an annual budget of $500,000 to $550,000.

Who should set up the family foundation?
Although it is perfectly feasible for a nonprofessional to set up a private foundation, there are several drawbacks to the do-it-yourself approach. First, it will take longer. The donor or family member assigned the task will need to locate the correct documents and do considerable reading to learn how to complete them. The occasional technicalities involved in filling out the various forms increase the likelihood that they will be returned for additional or revised information. There is also some potential for filing an incorrect submission, which could lead to classification in the wrong category.

Using a professional is recommended.  If you are contemplating the establishment and operation of a foundation without seeking appropriate guidance, you should reconsider. There are many potential pitfalls. Initial and ongoing assistance should be built into your budget. If you cannot afford such assistance, you should consider other options.

 

IS YOUR FAMILY SUCCESSFUL?

Just like a successful business, a successful family has a Mission Statement.  To read more about what a Mission Statement is and how to write one, see this article by Janet Bandera.  Your Family Mission Statement (click on the title)




FOUNDATION ALTERNATIVES
Through either a private foundation or a donor advised fund, a donor can leave a legacy that continues for generations and involves his or her children and grandchildren in giving. This article Private Foundations vs Donor Advised Funds (click on the title) contrasts donor advised funds and foundations.