Making an impact through a family foundation
After Liz Thompson’s husband, Don, retired as CEO of McDonald’s Corp. in 2015, the couple set up a foundation to fund nonprofit organizations across the education spectrum. They spent a long time considering their organization — the Chicago-based Cleveland Avenue Foundation for Education, which has $2 million in assets — and its future to make sure it aligned with their family’s priorities and had the most impact.
“There’s a big national debate about spending down all of your money before you die so you have a say over how it’s spent,” says Thompson.
For the Thompsons, passing down decision-making skills is as important as passing down financial assets. Knowing their kids are equipped to direct their own philanthropy helped the couple define their strategy.
“We’ve decided to spend as much as we can in our lifetime but pass on a certain amount to our kids so they can decide what levers they want to pull in order to have impact in their lifetime,” Thompson says.
Over the next 30 years, $68 trillion is set to be handed down from baby boomers to their heirs in what’s considered to be the largest transfer of wealth in history, according to a survey by the deVere Group, an international financial consultancy based in Dubai.
As part of this distribution of resources, many families with inherited or newly created wealth are forming foundations to support and manage their philanthropic strategy.
- Giving from foundations has increased in 10 of the past 11 years.
- In general, there are two types of foundations: corporate and trust.
- One key decision: whether to spend it all down in your lifetime or pass on a certain amount to your kids.
- Younger family members are more interested in shorter-term, limited-time commitments that deliver impact during their lifetimes, an approach known as spend-down.
Family foundations are usually funded by a single family, with the patron involved in its management and at least one family member serving as an officer or board member.
Giving from foundations has increased in 10 of the past 11 years, according to Giving USA, and made up 19% of total giving in 2021. Foundations provide governance and structure but can also be expensive to run and cumbersome, so experts advise patrons to consider a broad approach to defining their philanthropic mission.
Thomas Blaney, director of foundation services at the New York-based accounting and advisory firm PKF O’Connor Davies, shares how one foundation navigated its response to an unanticipated shift in the needs of beneficiaries.
“The patron, who has since passed, provided funding for Polish immigrants to Minnesota 40 years ago,” Blaney says. “Once the migration stopped, trustees were forced to consider another mission, so they pivoted to health care.
“But what do you do if you’ve made commitments for the next five years, and in year three there’s a refugee crisis? They adapted and gave emergency grants.”
In general, there are two types of foundations: corporate and trust.
Corporate foundations make up the majority because of their ease of use, Blaney says. Their bylaws can be adjusted and amended, and the foundations can be active during a person’s lifetime or upon death.
In contrast, a trust can be formed from a will or trust agreement allocating money when someone dies.
Flexibility is critical in succession planning. Nick Tedesco, president and CEO of the Washington-based National Center for Family Philanthropy, thinks that empowerment is also crucial to encourage buy-in from younger family members.
“The challenge is making sure you are not simply asking the next generation to execute decisions made before them,” Tedesco said, “that the controlling generation is aware of the need to share power and that there is a plan for transition that creates a relationship of equals.”
The third generation is usually the make-or-break point for a family foundation, he says. “The proximity to the wealth creation is far enough away from the source that there starts to be questions of individualism versus collectivism,” Tedesco says. Family philanthropy can fracture when members prioritize their individual interests over the collective.
Tedesco has advised family foundations that have successfully managed the participation of multiple generations and their interests while maintaining the family mission. “The legacy foundation remains intact,” he says, “and it has carved out assets for individual philanthropy entities based on the familial unit. There’s often a common set of values and commitments that carry through the generations.”
Successful foundations have allocations for individual discretionary spending, Tedesco says, but they strive for a healthy balance of individualism versus collectivism.
Other important decisions relate to the lifespan of a foundation. Alison Berman, president and CEO of the New Jersey-based asset management firm Palisade Capital, has, along with others, witnessed a recent shift.
Older generations have sought to fund endowments in perpetuity, often upon or after death, frequently dispersing the minimum, IRS-mandated 5% annually.
Younger generations, on the other hand, are interested in shorter-term, limited-time commitments that deliver impact during their lifetimes, an approach known as spend-down.
In 2020, Rockefeller Philanthropy Advisors reported that the number of foundations in its survey that had been established as time-limited had nearly tripled from 22 in the 2000s to 60 in the 2010s and now represent about 44% of foundations.
The different perspective is not only philosophical but practical, Berman says. “I don’t need to control what happens after I’m not here anymore. Look at the dynasties of America — the world has changed too much for those types of structures to work. There are a lot of expenses associated with a foundation, a lot of layers and staff.”
Ultimately, Berman agrees with the Thompsons and warns: “It’s less about creating legalistic structures — which, of course, is important. Much of it is about leading by example and getting the children involved from an early age. … Philanthropy is not as easy to do as people think.”