Family foundations let rich leave legacy

STEPHANIE Cordes, a graduate of the University of California, Santa Barbara, has a present from her father, Ron, that she treasures. It's a handmade pink scrapbook, titled, "5 Life Lessons From Dad." Inside are whimsical photos of her with friends and family alongside typed pages containing his simple guidance. The chapters are: "Seek your passion." "Do your best." "Good enough is never good enough." "No excuses." "Make a difference." "Go for it." She was moved. But what really touched her was a letter he wrote to her last fall, which concluded with: "You are my legacy." And she is, in more ways than one.

In mid-January, Ms Cordes, 24, quit what she had called her dream job, working at Conde Nast as an advertising sales assistant, to work full-time for the Cordes Foundation, the non-profit family foundation her father created when he and his two partners sold their firm, AssetMark Investment Services, to Genworth Financial in 2006 for US$230 million.

"I am going to be the legacy of the foundation," said Ms Cordes, who is an only child. "It is really important that I am involved because it is going to be mine eventually." According to the most recent statistics, the number of family foundations like the Cordes Foundation has exploded since 2001. There are now more than 40,000 family foundations in the US, making grants totalling more than US$21.3 billion a year, up from about 3,200 family foundations doling out US$6.8 billion in 2001, according to the Foundation Center in Washington.

These non-profits are on the upswing for several reasons. First, friendly tax breaks make the charitable vehicle appealing. And it offers philanthropists who want more control over their giving a way to give with fewer restrictions than would come with a donor-advised fund or writing a cheque to an established charity.

Then, too, there is often an underlying desire for baby boomers to instil in their children the significance of giving and compassion for those less privileged. A family foundation can curb a sense of entitlement that may come along with inheriting wealth.

The Council on Foundations defines a family foundation as one whose funds are derived from members of a single family. At least one family member must serve as an officer or board member of the foundation and as the donor.

And you don't have to be a billionaire to create one. Sixty per cent of family foundations have assets of less than US$1 million.

"We are not the Gates Foundation," said Ron Cordes, 55, who started his foundation with US$10 million of the proceeds from the sale of his firm. "We have several less zeros on our balance sheet." The challenge is "trying to figure out how you can really have an impact with a somewhat more modest amount of money," he said.

"As a corporate CEO, I was involved in philanthropy," he added. "My wife, Marty, and I gave money to lots of different things, but when I sold the company, I realised that I was able to open some personal bandwidth for myself that would give me an opportunity to have more direct participation in philanthropy."

Instilling the value of giving back in their daughter was certainly part of the plan. Stephanie Cordes was 16 when her parents started the foundation. She knew that her father was selling the business, but she didn't have any concept of family wealth, or the amounts involved, Mr Cordes said. "We never tried to push her into the foundation, but we wanted to put her in a position where those opportunities were available if she wanted to do them," he said.

Establishing the foundation has also allowed Mr Cordes, like many baby-boomers starting an encore career midlife, to ponder the question of how to "move from success to significance," he said. "How do you leave a legacy?" Mr Cordes beams with pride that his daughter is committing herself to following that legacy and will soon take a seat on the foundation's board, which consists of her parents and four outside members. "I cannot think of anything cooler than that," he said. Creating a foundation requires much more than money. Among other things, foundation founders must familiarise themselves with the myriad tax and other regulations involved and carve out the time required to review programmes for funding.

Traditionally, the chief complaints about creating a family foundation have been the time and cost involved, but that seems to be getting under control as more firms specialising in advising families are cropping up.

Costs vary by asset size and level of service and typically run the gamut from US$5,000 for a plain vanilla set-up to around US$35,000, said Elliot Berger, managing director of Arabella Advisors, a firm that specialises in philanthropic strategies and foundation management. Another, Advisors in Philanthropy, a non-profit based in Chicago, offers web seminars and other educational and networking opportunities. Ron and Marlys Boehm of Santa Barbara, California, were able to set up their US$1 million family foundation, the Boehm-Gladen Foundation, in three days for around US$10,000, with the help of Foundation Source, a private foundation advisory group, based in Fairfield, Connecticut.

"Our adviser made it very painless and quick," Mr Boehm said. "Although family foundations have grown in popularity, we found there were still not a lot of advisers who are knowledgeable about the ins and outs," said Mr Boehm, 60, chairman, chief executive, and primary shareholder of the publishing firm ABC-CLIO.

Annual administration fees can range from 0.86 to 1.62 per cent of total assets, depending on the size of the fund and whether there's paid staff, according the 2013 Foundation Operations and Management Report by the Association of Small Foundations.

And, by law, you must give away around 5 per cent of average monthly assets each year or face a 30 per cent excise tax on whatever portion of it has not been distributed within a year. Moreover, there's the Internal Revenue Service Form 990 to file annually. Net investment income of private foundations is generally taxed at 2 per cent but is often pared to 1 per cent through various tax strategies.

These IRS filings are not to be taken lightly. In the past, the tax agency has scrutinised family foundations for a variety of abuses, including family members paying themselves more than US$1 million to serve as foundation officers or charging exorbitant management fees. Bottom line: Auditors look for red flags that a family member is using funds as a personal piggy bank.

A lack of privacy can be a problem with a family foundation; all of your information is public information, and your 990 tax form can be viewed by anyone - for example, via the Guidestar database.

The upside: "The main advantage to a family foundation is control and flexibility," said Mr Berger of Arabella Advisors. "You have control over who is on the board, how the money is granted, how it is managed." And you have the flexibility to convert the foundation to a public charity in order to attract other funders to a particular cause. If you no longer feel the need to have a foundation, you have the ability to transfer the assets to a donor-advised fund.

If you want to be anonymous, a donor-advised fund is better. A donor-advised fund allows you to create a charitable account, say US$5,000 to US$25,000, usually through a financial services firm, like a mutual fund or brokerage firm. You allocate grants under an umbrella name, like the Jones Family Fund, but it is not considered public information. You can also avoid the costs and headaches of creating a foundation.

The fund companies take care of most of the administration and management. The three titans are Fidelity Charitable, Vanguard Charitable and Schwab Charitable.

The drawback to a donor-advised fund is that you typically do not have as much say in specific investments, and the money must be earmarked for a recognised 501(c)(3) public charity that is United States-based. Also, there are rules about how many generations can participate in grant-making.

Family foundations can walk a tightrope. On the one hand, they can be a vehicle to teach heirs but on the other, with several siblings and multi-generations, infighting can present a thorny issue.- NYT