Thematic investing: Exploring the genomics market

Personal legacy planningHow private foundations can unify intergenerational families

April 16, 2021

Key things to know

  • Trust and communication are essential in the long-term preservation of your family’s wealth.

  • A family’s bond can be strengthened across generations by working together on charitable endeavors.

  • Setting up a family foundation can also help rising generations grow and expand their professional skills. 

Seventy percent of wealth transfers fail from one generation to the next, with failure being defined as the involuntary loss of control over the assets.1

Families who overcome this statistic have one key thing in common: Total family involvement. All work together at coordinating decisions around the family’s wealth. Most importantly, family members communicate well with one another and have trust in each other.

Finding a way to facilitate trust, communication and proper preparation and development of the necessary skill sets of the next generation can be difficult and will vary from family to family. Today, many families are finding answers to these questions through a private family foundation.

If you’re thinking about starting a family foundation, here are considerations to help guide the setup, as well as potential benefits for your family and the long-term preservation of your family’s wealth.

Having all family members actively involved in the foundation can help to solidify values throughout the family and across generations.

5 considerations in setting up a private family foundation

  1. Develop a mission statement
    Before you start down the decision-making road, consider developing a mission and vision statement for the foundation based on your family’s values, goals and vision for your wealth. These statements will provide continuing guidance for future decisions across generations.

    Even young children can participate in the process. Their involvement will often enhance their commitment to the goals of the foundation. And if they later pursue a passion that’s based on a value expressed in the statements to which they contributed, their level of motivation is likely increased and the value more deeply imbedded.

    You may find it helpful to use a professional facilitator in your mission and vision statement development. Using a trained facilitator to help you “discover” and articulate your core values can be fun and enlightening. 

  2. Take care of legal considerations
    What type of entity would be best suited for your specific goals and objectives? What forms need to be files? What governing documents need to be prepared?

    Due to the technical nature of foundation establishment and operation you’ll most likely be working with various tax, legal and investment professionals. While legal and tax counsel are necessary, you may find that your current wealth management advisor has trained staff members with the necessary skill sets to help you expedite the process.

    Remember to keep sight of your overall mission and vision as you make decisions.

  3. Select board members
    It’s important that future board members understand their roles and duties. Some of their responsibilities may include:
    - Hiring and overseeing the foundation’s CEO
    - Review and planning for potential liabilities
    - Ensuring all legal obligations are met
    - Protecting the foundation’s human, intellectual and financial capital
    - Setting the mission and strategic direction of the foundation.

    Under most state laws, a minimum of three board members is required, while some experts recommended a minimum of five board members. As you consider who to include, you may want to start with finding a strong and competent board Chair. The board Chair should be dedicated to the mission of the foundation and able to guide, support, encourage and lead the foundation internally and publicly in the community.

    When selecting board members, strive to build a strong and engaged board. A foundation board needs members with impeccable reputations who are respected for their integrity and wisdom.

    You may want to begin your board member selection within your family to strengthen your sense of cohesion around a shared set of values and traditions. Also consider adding non-family members to bring additional expertise and diversity, as well as help mitigate any family tensions that may arise.

  4. Assign day-to-day administration
    Some of the daily administrative tasks of running a foundation include:
    - Keep complete, current and accurate financial records
    - Prepare financial statements
    - File tax returns and conduct audit reviews required by law
    - Receive applications for grants
    - Write checks and pay bills
    - Ensure appropriate liquidity between checking and investment accounts 
    - Prepare reports 

    It’s possible that many of these duties may be performed by members of your family if they have the necessary skill sets. In the right circumstances, these duties can provide an excellent environment conducive to an individual’s education and development. Still, many of these administration functions can be outsourced. It may be that a combination of outsourcing some of the functions and having family members provide others works best.

  5. Investment management and oversight

    There are special legal and tax limitations and restrictions that apply to the investment of a foundations’ assets. One of the most important issues is whether a private foundation has invested in such a way that “jeopardizes” its ability to carry out its charitable purposes. 

    Because of the special privileges and purposes afforded a foundation, rules exist to protect the benefitted charities. A private foundation must meet the fiduciary standard of care to protect its assets. A fiduciary must always put the best interests of those for whom he/she serves first and foremost in all they do. Heightened scrutiny may especially be given to securities traded on margin, any trading in commodity futures, investments in working interests in oil and gas wells, the purchase of puts and calls, straddles, the purchase of warrants, and selling short, among others.

    You may want to consider using some of the assets for impact investing, with the goal of producing both financial and societal benefits. You’ll also need to determine how much, if any, should be allocated to alternative investments. 

    An investment professional can assist you in determining the best selection of investments for your foundation’s resources. Be sure to work with one that’s well versed in the intricacies of investing for a foundation. They can help you develop an investment policy statement and provide you with regular economic and performance updates.

4 potential benefits of setting up a family foundation

  1. Enhanced family values
    As mentioned above, your family’s core values will be expressed in the foundation’s mission and vision statement, and having all members actively involved in the foundation can help to solidify values throughout your family and across generations. 

    Children learn values by watching what their parents do and doing it with them. Even kids as young as five or six years old can develop a philanthropic attitude. Find out what they care about, and what they may have a passion for. It doesn’t matter what the interest is, simply that they begin exploring their interests and realizing that they can make a difference.

    Working together will present opportunities for your family to support the passions of individual members and share in the satisfaction of the positive impacts achieved. This shared satisfaction can help increase your bonds of love and respect for each other and for the communities in which you serve.

  2. Working together
    You may have heard the often-quoted statement that “a family that works together stays together.” It also follows that “a family that plays together stays together” and “a family that serves together stays together.”

    Working together in a family foundation can be a bit of all three: work, play and service. Family unity is often enhanced when parents, children, brothers and sisters, spouses and in-laws work together in charitable endeavors. Working and serving together may help build and strengthen relationship bonds. Additionally, as grandparents, parents, children and grandchildren work together in their foundation’s endeavors, a legacy of generosity is built for future generations.

  3. Skill development
    Business skills such as communication, presentation and leadership can be developed and/or enhanced as your family discusses grant opportunities and listens as individual members present their case for their grant opportunity. Skills such as active listening and collaboration may also be enhanced by the lively discussions that tend to be a part of this process.

    Investment acumen can increase as your family discusses appropriate investment opportunities for the foundation’s assets. Working with a professional investment advisor may create additional educational opportunities for your family, as advisors share their knowledge and expertise with the next generation of family philanthropists.

    Foundations may also provide a sense of purpose and leadership responsibility for individuals who might otherwise feel that there’s no way to ‘out do’ their parents’ success and make their own mark on the world. Learning to run the foundation or take on a key leadership role gives them something that’s all their own. Responsibility and accountability can help individuals develop a greater sense of self-worth, pride and stewardship.

  4. Build trust
    You may want to ask your foundation’s board to employ a broad degree of leniency when approving grants recommended by family members. Doing so can increase the commitment of and strengthen trust among family members.

    While the board should make sure that grants go to causes which embody your family’s core values and goals, allowing the senior generation to take complete control and only allow grants to their favorite causes may diminish individual family member commitment and ownership in the process. 

    Remember that actions speak louder than words. Supporting selected causes can have a great impact than saying “pick a cause.” Open, honest, sincere and transparent communications and actions among your family will serve to build and strengthen trust.

    Private foundations may not be the best choice for every family. However, even with the risks and complexities, they do offer some significant benefits for the charitably-inclined family.

    Along with the potential tax advantages, a foundation can help unify your family behind service-oriented causes, while at the same time developing responsibility and leadership skill sets that will serve the family across generations.

    Learn how Ascent Private Capital Management® of U.S. Bank can  help guide your family legacy.

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