The Tax Code Loves Philanthropists

June 26, 20248 min read

Why Private Foundations Are So Popular Among The Ultra Wealthy And Why Every Entrepreneur, Investor, and High-Income Earner Should Consider Starting One.


Building a Legacy: Why Entrepreneurs and Investors Should Consider Starting a Family Foundation

Having worked with high-income-earners, high-net-worth individuals, entrepreneurs, and successful investors, for the past two decades in various legal and consulting roles, one thing is crystal clear - the pursuit of a lasting legacy often extends far beyond personal wealth accumulation.

It often involves building and creating a family legacy that involves managing an extensive portfolio of assets, in addition to social, humanitarian, and charitable contributions. A family foundation is a powerful vehicle that was enacted into the law to facilitate those goals and dreams and encourages people to view success in terms of financial success, and humanitarian impact - they two go hand-in-hand.

Charitable acts can be viewed as a one-time donation, where as philanthropy is a more formal and structured method to contribution. The private foundation (sometimes called family foundation) is the legal vehicle that provides the structure to transform your legacy into one that extends beyond mere financial success.

This article explores why starting a family foundation is a strategic move for wealth preservation, tax efficiency, and fostering a culture of philanthropy and investment acumen within the family.

1. The Vision: A Multi-Generational Impact Investment Fund™

Think of the private foundation as a multi-generational impact investment fund™ that allows families to donate pre-taxed income, appreciated or income-producing assets, or even proceeds from a profitable sale, while enjoying tax benefits, and control over a tax-free investment fund that is managed by family members and empowers charitable causes.

In short: A family foundation serves as an enduring institution that transcends generations, functioning as an impact investment fund that benefits both the family and society.

By establishing a family foundation, entrepreneurs and investors can strategically allocate their wealth to charitable causes while teaching their children the principles of investing, entrepreneurship, and giving back to the community. It serves as a place of employment for future generations, allowing you to pass on your knowledge on entrepreneurship and investing, while jointly engaging in charitable work at the same time - it's a great way to "lead by example".

2. Maximizing Tax Benefits and Wealth Preservation

  • Pre-Taxed Income Donations: Donating a portion of Adjusted Gross Income (AGI) or "taxable income" to a family foundation allows for significant tax deductions, reducing taxable income (up to 30% for individuals).

  • Asset Donations: Transferring assets such as stocks, real estate, or proceeds from a business sale to the foundation removes these assets from the donor's estate, circumventing gift and estate taxes and potentially reducing capital gains taxes.

  • Estate Tax Avoidance: By removing assets from their estate, donors can significantly reduce estate taxes, ensuring more wealth is preserved for future generations and charitable endeavors.

3. Teaching the Next Generation: Investing, Entrepreneurship, and Philanthropy

A family foundation provides a unique platform for teaching the next generation about financial management, entrepreneurship, and the importance of giving back. This hands-on experience equips the next generations with the skills and values necessary to continue the family's legacy of wealth creation and philanthropy.

  • Investment Training: Through the foundation, family members can learn about investment strategies, portfolio management, and financial decision-making, gaining practical experience in growing and managing wealth.

  • Entrepreneurship Skills: Involving children in the foundation's operations teaches them the fundamentals of running an organization, fostering entrepreneurial thinking and leadership skills.

  • Philanthropic Values: Engaging in charitable activities through the foundation instills a sense of social responsibility, encouraging family members to contribute positively to society and find purpose in their work.

4. The Strategic Benefits: Tax Breaks and Financial Growth

  • Tax-Free Investment Growth: The foundation can invest its assets without incurring capital gains taxes, allowing the fund to grow more efficiently and provide greater resources for charitable activities.

  • Compensation For Work Performed: Family members can receive reasonable compensation for their work in the foundation, providing financial support while contributing to its mission.

  • Asset Preservation: Establishing a foundation helps protect valuable assets from being spent or misused by heirs, ensuring that wealth is preserved and used for meaningful purposes.

5. Creating a Structured Approach to Charitable Giving

A family foundation offers a more structured and consistent approach to philanthropy compared to ad-hoc donations. This structure enhances the impact of charitable donations and ensures that the family’s philanthropic goals are met.

  • Consistent Donations: By setting up a foundation, the family commits to regular, sustained charitable contributions, amplifying their impact over time.

  • Alternative To Traditional Investing: The foundation's investment fund or assets do not incur income tax (around 20-30%) or capital gains tax (20%), nor are they subject to gift or estate taxes (18-40%), and are not included in the donor's estate and not subject to probate. Think of it this way: In exchange, you are committing to "powering and funding" social and charitable causes by providing grants and donations that equal at least 5% of the fund's value.

  • Strategic Grant-making: The foundation can develop a strategic grant-making plan, identifying and supporting high-impact projects and organizations that align with the family’s values and mission.

  • Long-Term Vision: A family foundation allows for long-term planning and vision, ensuring that charitable efforts are not only impactful today but also sustainable in the future.

6. Steps to Establishing a Family Foundation

  • Define the Mission and Vision: Clearly articulate the foundation’s mission, focusing on areas of impact that resonate with the family’s values and goals.

  • Legal Structure and Compliance: There are multiple steps involved in creating and filing your private foundation, including state level filings, and IRS (federal) approval of your entity. It could take several months to get all the approvals so it's important to work on these strategies early in the year to ensure you can take the deduction.

  • Initial Funding and Investment Strategy: Determine the initial funding for the foundation and develop an investment strategy that aligns with its mission and goals. Again- timing is everything, the donation MUST be made by the December 31 of the year you are trying to claim the deduction.

  • Governance and Management: Establish a governance structure, including a board of directors or trustees, to oversee the foundation’s activities and ensure alignment with its mission.

  • Grantmaking and Program Development: Develop a grantmaking strategy, identify potential partners and projects, and create programs that align with the foundation’s mission.

7. Case Study: A Legacy of Impact

  • Consider the example of a tech entrepreneur who established a family foundation to support education and environmental conservation.

  • By transferring a portion of his company’s stock to the foundation before an exit, he was able to leverage the high gift tax exemption limits, significantly reducing his taxable estate.

  • The foundation’s investments in renewable energy projects generated substantial returns, funding scholarships and conservation efforts while teaching his children the importance of sustainable investing and philanthropy.

  • The foundation not only preserved the family’s wealth but also created a lasting legacy of impact.

Conclusion: A Strategic Move for Family and Society

Starting a family foundation is a strategic move for successful entrepreneurs and investors, offering a powerful way to preserve wealth, achieve tax efficiency, and create a lasting impact.

By thinking of the foundation as a multi-generational impact investment fund, families can ensure that their wealth benefits both their heirs and society. This approach provides a structured, sustainable way to support charitable causes, teach the next generation about financial management and philanthropy, and enjoy significant tax benefits.

"We see our philanthropic work as an opportunity to learn and grow," Zuckerberg stated in a public letter. "It's a chance to understand the world better and to improve how we approach giving over time."

Next Steps

  • Schedule a consultation or attend a free workshop (details below).

  • Develop a Strategic Plan: Outline your foundation’s mission, vision, and strategic goals, ensuring alignment with your family’s values and objectives.

  • Launch and Scale: Begin with an initial funding round and gradually scale your foundation’s activities, leveraging investments to grow your impact over time.

The integration and alignment of your foundation could take several years, especially if you want to leverage the deductions limits more closely, which allow a 30% AGI reduction for cash and 20% AGI for assets.

By starting a family foundation, entrepreneurs and investors can create a lasting legacy that transcends generations, fostering a culture of giving, investing, and entrepreneurial spirit within their families while making a meaningful contribution to society.

This structured approach not only maximizes tax benefits and preserves wealth but also ensures that charitable efforts are impactful and sustainable. For those committed to leaving a legacy of both financial success and social good, a family foundation offers the perfect vehicle to achieve these goals.


We invite you to attend a free workshop where we discuss the above strategies in more depth and provide you with an opportunity to speak with our attorneys and tax professionals who operate in the world of foundations, day-in and day-out.


ATTEND A FREE WORKSHOP:

We invite you to attend a free workshop where we discuss the above strategies in more depth and provide you with an opportunity to speak with our attorneys and tax professionals who operate in the world of foundations, day-in and day-out.

Register for a free workshop
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