Terminating a Private Foundation

Addressing clients' motivations for terminating a private foundation, and reviewing the alternatives, such as a donor-advised fund or public charity, can help ease the transition.

December 18, 2008
by Community Foundations

The number of private foundations has increased dramatically over the past several decades, but so have the number of families wishing to terminate them.

Why Foundations Terminate

Family foundations choose to terminate for many reasons, including the family losing interest, the funds declining and administration becoming burdensome. Some families opt for a donor-advised fund in which they can focus on grant-making without the administrative hassles.

The administration of a private foundation can be a significant burden. Running a $3 million foundation may be harder than running a $30 million one because smaller foundations cannot afford to pay staff to handle daily operations or to consult on issues such as succession planning. At the same time, the small foundation must find resources to pay for expert outside assistance on legal and accounting issues.

The Costs of Maintenance

For individuals who are not totally dedicated to their foundation, the work can be drudgery, from a personal and financial point of view. The personal costs of doing business include researching charities, educating younger family members, reading grant proposals, retaining advisors and disbursing grants. From a financial point of view, costs often outweigh benefits. Professional services may include legal counsel, accounting and tax filings.

Succession Issues

Regardless of whether a foundation has $10 million or $30 million in assets, the most common motivation for termination is the family-succession issue. If the founder is older, the children or grandchildren may not share his/her values. The family may be scattered across the country, or the family may lose interest in running the foundation. Sometimes the reason for termination can be quite emotional. For example, a couple may start a foundation together, and if one spouse dies, it can be almost painful for the surviving spouse to continue.

Often family members simply disagree on the direction of their philanthropy. Family friction — whether bridling over each other's choice of charities or facing long-standing family dynamics — can cause a communication meltdown. In a surprising number of cases, the generational issues related to certain causes may create family conflict.

Avoiding Mistakes

Because of the costs and potential headaches involved, advisors may want to do sufficient up-front work with clients to clarify that a private foundation is right for them.

Advisors can help by working with clients to prioritize their giving goals and review the benefits and drawbacks of each giving vehicle option. Bringing multiple generations into these planning sessions ensures that everyone gains insight into the process, and the choice ultimately becomes a family decision. The more clients know in advance about the opportunities and pitfalls of each type of charitable vehicle, the easier the transition will be.

Learn more at www.communityfoundations.net.

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Copyright 2008, Council on Foundations
Used with permission.