In 1998, eBay founder Pierre Omidyar and his wife Pam formed the Omidyar Family Foundation to use their wealth for funding nonprofits while also providing a great model for how to start a family foundation. But in 2004, after considering the importance of entrepreneurship to society overall, they pivoted—transitioning the organization to become Omidyar Network, a hybrid foundation that supports both for-profits and nonprofits. Since then, the foundation has committed more than $1 billion in impact investments and grants in early-stage enterprises.
While the Omidyars’ approach is unusual, it echoes the reasons many wealthy families form foundations to fund causes they support and offers a potential model for families looking to start one. Before choosing yours, however, it is essential to understand the purpose and advantages of family foundations and the first steps to take.
What is a Family Foundation?
While there’s no exact definition of a family foundation, these organizations are typically tax-exempt, legal entities established, funded, and operated by families using their assets to support charitable causes. They also comprise the vast majority of US grant-making nonprofits.
What are the Advantages of a Family Foundation?
These foundations provide a variety of benefits beyond the moral rewards. A few of them include:
- A long-lasting legacy. Family foundations usually are formed to exist in perpetuity. Thus, they can build a long-lasting family legacy as well as teach subsequent generations about the value of giving. Also, holding regular get-togethers provides a way for far-flung family members to connect and share deeper conversations about what matters.
- Financial benefits. A number of financial benefits come with forming a foundation. Families can get an income tax deduction for funds contributed to the foundation, and these contributions are then also not included in the donor’s estate, thereby avoiding estate taxes. Then there are capital gains benefits such as avoiding capital gains taxes on appreciated assets.
- Control and privacy. One of the key advantages of a family foundation is that families can control exactly how their money will be used. It also adds a measure of privacy and reduces hassles as requests and appeals for donations and grants can be directed to the foundation.
How to Start a Family Foundation
Where should you begin your journey to establishing a family foundation? Here are five key steps to take.
1. Form a Mission Statement
Like any organization, family foundations need a statement laying out their vision and underlying principles, intentions, and goals. This vision is critical for guiding not only board members but also family, staff, and the community.
2. Choose Advisors
Families require advisors, such as attorneys and accountants, to set up the foundation’s legal and tax structures and to produce annual reports on the organization’s activities for the IRS. They also typically need financial experts to guide investment strategy.
3. Establish a Governing Body
Foundations typically have their own governance bodies, either a board of directors or trustees, in charge of overseeing the foundation’s activities and executing its mission. Exactly who is involved depends in large part on the foundation’s goals. If its mission focuses on, say, highly technical research, then the board should probably include specialists with relevant expertise in addition to family members. If the mission involves less-specialized knowledge, family members will probably suffice. Nevertheless, it’s good to remember that diversifying private foundation oversight provides a path to better mission alignment.
4. Plan for Passing the Baton
Determining the matter of succession early on is crucial to long-term success. That means deciding who will control and manage the foundation once the first generation is unable to do so. Without a solid, strategic plan that includes protecting the foundation’s mission from family stressors, all the work by the first generation may not survive to the next
5. Choose between Non-Profit or LLC
While most family foundations are non-profits, some now operate entirely, or partly, as limited liability companies (LLCs). One advantage to the latter is the ability to make impact investments into for-profit companies. That’s one major reason Omidyar Network runs a non-profit grant-making entity as well as an LLC. However, non-profits come with their own advantanges, so be sure to weigh the two carefully before you decide.
Ultimately, learning the basics of how to start a family foundation is only the beginning. Over time and as experience is gained, families can expect their foundations to evolve along with overall societal needs and the issues that gain prominence from one generation to the next. With a solid foundation to build on, your family foundation can flourish for decades to come.