Consider your own private family foundation

Drs. William J. Davis and Joseph J. Massad and financial consultant Gary L. Rathbun discuss the advantages of setting up your own private foundation.

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by William J. Davis, DDS, MS
Joseph J. Massad, DDS
Gary L. Rathbun, CLU, ChFC

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Finally, it's Friday. You have had a long, hard week of restorative dentistry, root canals, and impacted wisdom teeth - not to mention the endless stream of company reps, order screw-ups and equipment repairs. To top it all off, your best hygienist is quitting to go to work for another dentist. So tonight you plan to enjoy a nice, quiet dinner with your family and relax.

Just as you sit down to dinner, the telephone rings and the caller asks for Dr. Niceguy. Not knowing whether it is a patient emergency or not, you take the call.

"How are you this evening, Dr. Niceguy?"

"Fine," you say, knowing that you are about to be hit up for something.

"Dr. Niceguy, I'm calling to ask for a donation to the Association of Left-handed, Dyslexic, Nearsighted Redheads of America."

You say, "No thank you," and hang up the phone.

The call sets the tone for the rest of the evening. You turn on your answering machine and order your family not to answer the telephone until dinner is over and the dishes are done.

Can you picture this situation? Have you ever had a similar one? Was your first thought while reading this, "Been there, done that"? If so, then we encourage you to keep reading.

Let's look at a different scenario. It's again Friday night, and you had another long, hard week. (Sorry; we can't help you fix hard weeks in this article. Maybe a later one.) Anyway, you just sit down to dinner and the telephone rings. The caller asks for Dr. Caring. You would rather shave your head and chew on tin foil than talk to this guy. You calmly say, "Fine."

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"Dr. Caring, I am calling on behalf of the Hollywood Celebrities Without Limo-Drivers Fund. Your name was given to us as someone who might enjoy contributing to this very worthy cause. I'm sure you can relate to the degradation and hardship that these people go through every day of their lives without the benefit of having their own limo-driver."

"This sounds like a very worthwhile organization that I'm sure benefits dozens of needy actors," you reply. "However, my family and I channel all of our charitable donations through our private family foundation ... and you are more than welcome to submit a grant request. We read all requests and make decisions on the donations once a year. However, we just met last week and decided on our contributions for the next 12 months, so take your time submitting your grant request. Would you like to know where to send your request?"

Click!

When was the last time a charitable solicitor hung up on you? Most of these calls are from professional solicitors who receive a percentage of everything they collect and aren't really interested in the charity they represent. They are not interested in submitting a grant proposal and waiting for a charitable contribution.

If you are a dentist, everyone thinks you are automatically rich and that you want to contribute to every cause that solicits money. Right? Now don't get us wrong; most dentists are very charitable-minded and want to give to worthwhile causes, because they want to give back to their community. What we are suggesting is that you think carefully about what you give back and how you do it.

What we would like to do is introduce you to the concept of having your own private family foundation. For many people, their first thought is that private foundations are only for the very wealthy. In research done by Price & Associates, LLC, in Stanford, Conn., most private foundations have less than $1 million in assets. This will shock people who think that private foundations are for people with family names like Kennedy, Rockefeller, or Ford. The fact is, more and more "ordinary" people - like dentists - are establishing their own private foundations for a multitude of different reasons.

First, let's take a couple of steps back and learn some of the basics of private foundations. Private foundations have been around since the early 1800s, when very wealthy individuals like Andrew Carnegie, John Rockefeller, and others decided to use some of their money to benefit the public. One of the interesting facts of these early philanthropists at that time was that there were no income or estate-tax advantages for giving to charity. Their motivation was purely to help their community. Of course, on the flip side, there was a lot less government intervention in their business and much less taxation on their income.

A good definition of a private foundation is given by Dwight MacDonald in his book The Ford Foundation: the Men and the Millions, when he says that a private foundation is "a large sum of money completely surrounded by people who want some." While this is probably very accurate, it does not help us understand private foundations and how they apply to our particular situations.

The IRS defines private foundations by exception rather than in explicit terms. F. Emerson Andrews, in his book Philanthropic Foundations, gives us the best definition in use today:

"A foundation is a nongovernmental, nonprofit organization with its own funds (usually from a single source, either individual, family, or corporation) and program managed by its own trustees and directors, which was established to maintain or aid educational, social, charitable, religious, or other activities serving the common welfare primarily by making grants to other nonprofit organizations."

As you start looking at the mechanics of establishing and operating your own private foundation, you will be surprised how easy and relatively inexpensive it is to set up. This is contrary to what most solicitors for a charity would lead you to believe.

The standard or "family" foundation is the most common type of private foundation. It generally does not engage in any type of charitable activity itself. The standard foundation is designed to accumulate funds from contributions, usually from a single source or family, and then distribute funds to other public charities on an annual basis.

One of the major attractions of having your own standard private foundation is that your foundation can support charities whose purposes are consistent with your beliefs and philosophy at any given point in time. Another attraction is a level of privacy and anonymity for your charitable donations. You also can memorialize your family name (in perpetuity) with a college scholarship or local event. Your particular charitable philosophy will be continued long after you've gone to that great dental treatment room in the sky.

A standard foundation needs a board of trustees to evaluate grants and charitable causes and make the final decision on the distribution of funds. Many times, this board is made up of family members, colleagues, and friends who share your enthusiasm and beliefs.

Typically, the nature of a standard foundation allows a donor to provide for future grants by having the assets inside the foundation invested and reinvested, essentially tax-free. The tax rules allow the foundation to invest in almost any type of investment with no restriction regarding diversification. There are some minor restrictions with regard to jeopardy investments, but, generally, prudence and good business judgment will avoid most of these issues.

From an estate-tax aspect, there is no limit to the amount that can be transferred from your estate to your private foundation. This makes it an attractive option for post-mortem funding.

Let's not paint too rosy of a picture here, however. There are some disadvantages to establishing your own private foundation - not the least of which are some of the restrictions and excise taxes associated with a private foundation. You will have to get an attorney involved to draft the document and help you file with the IRS for nonprofit status. There is also annual paperwork, which will probably require the assistance of a competent CPA. Finally - and probably the most important negative - are the restrictions regarding the amount of current income tax deduction allowed for donations into the foundation.

Although the rules of establishing and maintaining a standard private foundation seem complex and a little discouraging, there are many reasons for you to investigate this option thoroughly. The keys to best results are education, knowledge of the general rules and restrictions, consultation with competent advisors, and, most importantly, the charitable intent.

The amount you wish to contribute immediately or over time will determine whether a private foundation is the proper vehicle to use or not. A private foundation generally will be cost effective for larger contributions ($1 million or more) or a series of smaller contributions over time ($250,000 a year for several years).

So, until you have your own foundation, don't answer the phone at dinnertime on Friday after a hard week at the office. You never know when those left-handed, dyslexic, nearsighted redheads or out-of-work limo-drivers will call for a donation!

References available upon request.

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