Tuesday, November 14, 2006

Foundations and Their Role in Philanthropy

Family foundations are mentioned numerous times in Leaving Microsoft to Change the World, a book I recently reviewed. I decided I better do some research to understand what foundations are and why people set them up. Here's what I learned from a free online course at the Foundation Center web site.

Foundations are:

  • Non-profit
  • Non-government
  • Generally funded by a family, individual, or company
  • Organizations that typically grant money to non-profit organizations, often using only the investment income from an endowment
  • Taxed 1-2% on investment income from the endowment
  • Required to pay out at least 5% of assets each year to maintain non-profit status
  • Managed by trustees or directors, which often include the primary donor or family members
  • Required to file Form 990-PF, which lists officers, assets, and grants
  • Not the primary source of private donations to non-profits; individuals and bequests account for 83% of private donations, whereas foundations and corporations account for only 17%
  • Not required to have "foundation" in their name (e.g., Rockefeller Brothers Fund, Inc.), and some organizations that call themselves foundations do not fit the definition (e.g., Indiana University Foundation); the Bill and Melinda Gates Foundation is an example of a private foundation
  • Generally focused on local causes, with only 5-10% acting on a national or international scale

Families start foundations to:

  • Balance their giving, allowing steady donations regardless of current year income
  • Instill a commitment to giving within the family
  • Create a legacy
  • Take advantage of tax breaks, though one can legally donate a larger percentage of adjusted gross income to public charities (50%) than to a private foundation (30%)

Requirements to start a foundation include:

  • Incorporation in a given state, typically as a non-profit corporation, but sometimes as a foundation
  • Filing for tax-exempt status

If a foundation appeals to you but you don't want to go through the hassle and paperwork, a donor-advised fund may be a good alternative. I'm not convinced that I need a family foundation at the moment. For the time being, my wife and I are de facto directors of our unofficial family foundation. Though I think it could be fun to have an extended Gunderson Family Foundation, I agree with one comment that I read while researching, suggesting that a family foundation could actually be a source of unnecessary contention, since people have different ideas about how to spend, invest, or save money.

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