Is a Family Foundation Right For You?: Five Questions to Ask Yourself

Peter Alderman was only 25 when he died in the September 11th terrorist attacks on the World Trade Center. Young, vivacious, and loved by many, Peter was the bright center of the Alderman family. Instead of surrounding themselves in the grief of such a profound loss, Peter’s parents, Steve and Liz Alderman, searched for a way to honor his memory.

“We looked to a number of different things to do, but setting up a memorial or something along those lines wasn’t good enough for us,” Steve Alderman said. After seeing a news program that reported nearly one-sixth of the world’s population has suffered due to torture, terrorism or mass violence, the Aldermans gained a new perspective on their loss, and decided to create a family foundation to aid victims of violence and terrorism worldwide.

Liz and Steve Alderman’s story of how they came to form the Peter C. Alderman Foundation is a familiar one in the world of philanthropy. Family foundations account for nearly half of all private foundations, according to Council on Foundations, a nonprofit that provides information and services to endowed grantmaking organizations throughout the U.S. and abroad.

Many of the reasons for starting such an enterprise are deeply personal, such as the loss of a loved one or an illness that a member of a family is going through. No matter the motivation, however, there are five key questions that anyone thinking of starting a family foundation should answer before taking action:  

What is a family foundation?: While there is no legal definition of a family foundation, this is a common term for a private foundation that is founded and run either by the donor and/or members of his or her family. These types of foundations issue monies through grants that support projects and initiatives, which help advance the organization’s overall mission.  A family foundation functions as a charitable organization, says Robert Constantine, vice president for college advancement at Unity College. “It can, therefore, be infused with gifts other than the individual family.” This includes investments and funds raised through external events and drives.  Private foundations are, however, required to pay out five percent of their assets annually in order to retain tax-exempt status and also follow gift receipt guidelines and other IRS regulations.

Is a family foundation right for me?: In short, this type of organization is best for individuals with a high net worth and vast financial assets. Heather Gee, vice president for development services at The Philadelphia Foundation, recommends that families who are not looking to establish a fully staffed organization or grow assets to at least $10 million explore other avenues for giving, such as a donor-advised fund. “For families who want to create a family legacy, have control of what the money will be used for and how the foundation will operate, a family foundation is often the perfect fit.”

Those who are looking to give on a smaller scale have a number of options, as well, says Jonathan Gassman, director of tax and wealth management for Gassman and Golodny Planning Concepts, a boutique accounting and financial planning firm in Manhattan. “Donors have choices as far as how to give: outright, donor-advised funds, supporting organizations or private foundations. It comes down to the donor’s motivation, vision, values and goals.

What kind of capital would I need to form a family foundation?: The general recommendation is a minimum of $1 million, according to Glassman. If you don’t have a substantial amount of money to start the foundation off with, then a donor-advised fund or other mode of giving may be a better choice. “It doesn't make sense to set this type of charitable organization up if you don't have significant assets to place in the foundation,” Constantine advises. The Aldermans, for example, began their foundation with the $1.4 million dollars they received from the 9/11 Victims Compensation Fund. They said that they felt it was the right thing to do because “the only way for us to counteract great evil was with great good.” They supplement this endowment through fundraising efforts.

What is involved in setting up a family foundation?: With any venture involving the distribution of funds, there are many legal and financial regulations that must be followed. It’s a good idea to start with people and businesses you trust when it comes to embarking on this process. Consult with your family CPA, lawyer, and financial advisor first and ask if they have experience specific to forming a foundation. If not, you can rely on their guidance to find professionals or firms with a proven history of working with this type of organization.

Also, consider what the foundation’s goals, mission, and values would be, and look to gain as much support as possible from the start. “Philanthropic fundraising is not an individual pursuit but one that needs the help and support of a vast network of individuals,” says Andrew Abramson, co-founder of the Cure Breast Cancer Foundation, a New Jersey-based family foundation devoted to funding research at Memorial Sloan-Kettering Cancer Center. “You need to have a defined idea that others can grab onto.” 

What are some of the benefits I can expect from starting a family foundation?: There are various financial benefits, including tax considerations, for establishing a family foundation. However, the personal benefits can be even greater. Starting a family foundation can help instill values throughout the generations and keep families united. For those inspired to create a foundation after a tragic loss, making a difference in the memory of those lost can be an exercise in healing, as well.