A private foundation is more than just an entity that allows you to make donations to qualified donees. It is a legal structure and an operating corporation. Having a formal structure around your giving, like a private foundation, is just like having a business. The motivations for setting up these types of organizations range from purely altruistic to more technical as part of a tax planning solution. From an altruistic perspective, the foundation might be established as a tool to bring family members together, an entity to strengthen a corporate or family brand in a community, or a financing solution to a complex social problem. From a wealth planning strategy it might be used for tax management, for long-term wealth transition planning or for long-term community planning. What a private foundation is not, is a tax-sheltered bank account for political or personal gain.
Private Foundations are in the news these days in light of the civil lawsuit that the Trump Foundation recently settled in New York. In this case the Attorney General filed the suit on misappropriation of funds specifically how the Trump family used those funds for personal expenses around Mar-A-Lago Club and Donald Trump’s Presidential campaign expenses.
At the base minimum for a US Private Foundation it must, “spend at least 85 percent of its adjusted net income or its minimum investment return, whichever is less, directly for the active conduct of its exempt activities (the income test).” In essence what this means is that the foundation has to spend the funds on activities that are part of its social mandate and objects.
In the summer 2018, Karma & Cents conducted some research on Canadian private foundations and the amount that could be considered dormant. This research drew upon StatsCan information from 2016-17.
Canadian Private Foundation Stats
Of the 5700 private foundations operating in Canada as of 2016, approximately $40Billion is sitting in private family foundations. According to Philanthropic Foundations of Canada $2Billion was donated by these foundations to qualified donees in 2017. In a conversation with a leading charities’ lawyer based in Toronto, he estimates that 23% of Canadian private foundations are dormant according to CRA definitions. When we dove into this number we realized that this represents almost $12Billion not being directed into the charitable sector annually.
Dormant Private Foundations
There are two reasons for this dormancy:
- Lack of incentive for asset managers to deploy the capital beyond the 3.5% mandated by the CRA and for these managers to look beyond the original recipient organizations laid out by the founder.
- Lack of interest by the inheritors of theses foundations to consider different opportunities to make a difference.
The benefits of setting up a private foundation are numerous. The reasons range from creating a living legacy, to establishing multi-generational continuity and family connections to basic tax planning. Regardless of why you set up a foundation, understanding the rules of the game, what the objective is, and how to execute on that objective is what will keep you onside.
Avoid Going Down the Wrong Path
So how do you avoid going down the wrong path? Planning for transition of wealth and assets is the only way to avoid the inevitable legal pitfalls. Things to consider when planning for starting a foundation and transitioning it to the next generation:
- What do you want to accomplish with your social capital?
- How do you intend to leverage this foundation to further the objectives? Will you be tapping into your network? Will you be providing expertise alongside your contribution?
- What is the timeline that you envision for this entity? Is the intention to live long after you are gone, or something that should be wound down?
- Who in your family or network is qualified to run the organization? What makes them qualified? Do you need to have external advisors to support the direction of the foundation?
Planning ahead ensures that your money is generating the greatest bang for its social buck. To learn more about how we help you think through your philanthropy planning process, click here.