5 reasons that wealthy families should start a foundation now

When times are tough economically, Americans are used to tightening our belts to make ends meet. As a kid growing up in the 1970s, I remember how my parents would replace products like Jif Peanut Butter and Crest toothpaste with their off-brand competitors to help stretch the household budget.

While finding ways to cut back and save in a recessionary environment is important, households with committed and established philanthropic goals should make concerted efforts to follow through with their planned giving. Why? When the average American is stretched thin, times are even tougher for those at the lowest rung of the economic ladder. Meanwhile, many noncommitted givers — people who write checks a couple of times per year — also drop off, which creates a dire situation for both those in need and the nonprofits struggling to serve them.

We saw a version of this situation play out during COVID-19, as many nonprofits had to scramble to provide food and other household necessities to newly laid-off workers. At the behest of charitable partners, corporate and longtime donors converted planned giving to general operating support to allow nonprofits greater flexibility to respond to the crisis.

More recently, rising inflation has further strained many nonprofits, and the situation will likely worsen as the country enters what many economists expect will be a low-growth or recessionary environment.

In times of economic uncertainty, family foundations serve as an engine for philanthropy, providing a reliable source of income when others are retrenching. Foundations also help families preserve wealth by providing tax advantages.

Here are five reasons that wealthy individuals and families should start a foundation as a vehicle for their philanthropy and to help mitigate the effects of a recession:

1. Creates a legacy. Unlike one-off gifts, family foundations are designed to last in perpetuity. As a result, families can build their legacies around shared values, which not only strengthens intergenerational bonds but also ensures that a family’s commitment to a cause will endure. Many famous family names are synonymous with cause-related giving, such as the Rockefeller Foundation’s support of the arts or the Lucile Packard Foundation’s longtime commitment to funding medical care and research for children.
2. Provides optimum flexibility. Though family foundations often support public charities, they are set up to allow the donor to give more broadly to organizations and even individuals. Family foundations can write checks — or grants — to those in need of emergency assistance and make gifts to overseas charities, even when there is no IRS-recognized 501(c)(3) to serve as an intermediary. Foundations can even provide scholarships and offer other types of award programs.
3. Tax savings. While individuals typically take a standard charitable deduction in any calendar year, foundations can be more considered in their approach, taking an upfront deduction when the foundation is formed and then making charitable gifts over time. Since a foundation is only required to make qualifying donations of at least 5% of the previous year’s assets, founders can slowly build up funding for their foundations. Families can also gift appreciated assets to the foundation to avoid potentially paying capital gains. And, of course, foundations also play a key role in estate planning.  
4. Offer loans and make investments. In addition to providing gifts and grants, foundations can make low- or no-interest loans to charitable organizations and use the proceeds from the loan to fund other programmatic initiatives. These initiatives count toward the foundation’s required 5% minimum payout. Foundations can also make equity investments in for-profit commercial ventures for charitable purposes, such as funding research for vaccines or supporting a business that employs formerly incarcerated individuals.
5. Pay programmatic expenses. When you form a foundation, you can earmark all legitimate expenses — such as research, conferences and travel-related spending — to your minimum-distribution requirements. You can further pay qualified staff, including family members, reasonable compensation for their work.

Starting a foundation is not for the casual donor. But for wealthy individuals and families committed to philanthropy and building a legacy, starting a foundation is a great way to contribute to a cause bigger than yourself while providing charities a reliable stream of income that is highly important, especially in times of low economic growth.

For charities, family foundations create consistency, while donors enjoy both tax advantages and the intangible rewards that come from bringing family members together — teaching future generations about the importance of giving back and creating a legacy that will live on through their good works.