For individuals with significant wealth, estate taxes can pose a challenge. As a response, high-net-worth families often seek strategies to preserve their estates for future generations while also fulfilling philanthropic goals. Private family foundations and donor-advised funds (DAFs) offer unique avenues to achieve these objectives.
Understanding Private Family Foundations
A family foundation is a private entity that is funded by family assets for charitable purposes. It’s a way to maintain control over the philanthropic activities and the legacy you want to create. These foundations can range significantly in size and impact, operating on both small and large scales.
The setup of a family foundation can occur at any time, and it often reflects a desire to manage wealth that surpasses immediate family needs. This legacy planning tool has several benefits:
Tax Advantages: Family foundations enjoy a favorable tax status, including reduced taxable income through charitable contributions, avoidance of high capital gains taxes, tax-efficient asset growth, and potential elimination of estate taxes. For instance, donating appreciated stock to a foundation can avoid capital gains taxes and provide an income tax deduction.
Creating a Legacy: Establishing a foundation can embed philanthropic values across generations, creating a lasting family legacy. It provides a structure for giving and helps to focus charitable efforts on the family’s chosen causes.
Developing Future Leaders: A family foundation serves as a training ground for the younger generation, imparting lessons in wealth management and philanthropy. This involvement often becomes an integral part of their life’s work.
However, running a family foundation isn’t without challenges. It requires diligent record-keeping and adherence to IRS regulations, including mandatory annual distributions and filings.
Donor-Advised Funds
For those seeking a simpler option, donor-advised funds offer a flexible alternative to family foundations. DAFs are charitable investment accounts managed by a sponsoring organization. The donor contributes to the fund and advises on how the grants should be distributed over time.
Benefits of DAFs:
- Ease of Setup: DAFs can be established quickly, without the need for IRS approval.
- Tax Efficiency: They offer immediate tax benefits and can accept various types of assets.
- No Distribution Requirements: Unlike family foundations, DAFs are not subject to the 5% distribution rule.
- Anonymity: Donors can maintain privacy, as DAFs do not require public disclosure of donors.
Setting Up a Family Foundation
If a family foundation aligns with your estate planning goals, here are the steps to consider:
- Identify a Mission: Develop a clear mission statement that articulates the foundation’s purpose.
- Establish an Entity: Choose between setting up as a trust or corporation, and seek to obtain tax-exempt status from the IRS.
- Create a Board: Appoint board members who share the foundation’s vision, whether they are family members or outside experts.
- Fund the Foundation: Determine the initial funding and develop an investment strategy to support grant-making activities.
- Begin Grant-Making: Implement a diligent process to identify and support causes that align with the foundation’s mission.
Conclusion
Both family foundations and donor-advised funds provide meaningful opportunities for philanthropically inclined individuals to manage their wealth and create a lasting impact. When considering these options, one must weigh the level of involvement desired, the tax implications, and the legacy one wishes to leave.
Working with our firm will ensure that whichever vehicle you choose aligns with your values and estate planning objectives, paving the way for a philanthropic journey that extends your influence far beyond the bounds of your own lifetime.
Take Action Today!
We can help you include a philanthropic element in your legacy plan, and short of that, we can gain an understanding of your unique situation and provide the appropriate recommendations.
The first step is to set up a consultation at our Westport or Glastonbury, CT estate planning offices, and you can do just that by giving us a call at 860-548-1000. If you would rather send us a message, fill out our contact form and we will get back in touch with you promptly.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021, 2022 and 2023.