Family Business Advocates: 2017 Highlights and Plans for 2018As we reflect on 2017, we thank our blog subscribers for making Family Business Advocates a great success. In case you missed them, below are some of our most popular blog posts from 2017:

We also hosted two well-attended and thought-provoking events with our clients and friends. In February, we hosted “Economic and Legislative Outlook for Family Business Owners,” and in November, we hosted “Transitions in the Family Business, Conversations with Family Business Owners and Leaders.”  Our “Transitions” event was followed by several blog posts highlighting insights from the family business owners and leaders who were panelists at the event.

Looking ahead, we expect that the recently enacted federal tax reform legislation will remain a dominant topic in 2018. The new tax law has already generated a substantial amount of commentary from accounting firms, law firms and other advisors. In the coming weeks, our Family Business Advocates blog will focus on key elements of the new tax law that impact family business owners. We plan to host an event for clients and friends in early March to discuss and exchange ideas about how the new tax law may impact, and create opportunities for, family business owners.

Please be on the lookout for our upcoming blog posts on the new tax law, and stay tuned for more information about our event planned for March.

Diving into Family Philanthropy (Segment IV): Family Philanthropy – Where to Begin?In our previous posts on family philanthropy, we addressed the benefits of family philanthropy, choosing the right giving vehicle, and investing for impact. In this final post in our four-part series, we discuss how to get started with your family philanthropy. While there is no right or wrong way to “do” family philanthropy, we find it helps to begin with a clear idea of your goals and objectives. We’ve designed the questions below to help you start thinking about what you might like to accomplish for your community and your family through your philanthropy.

1. What do you want to achieve with your family’s philanthropy?

  • Is there a particular cause or issue area that ignites your passion to give?
  • Do you want to be able to deploy your charitable dollars wherever the need is greatest as needs change over time?
  • Are you seeking a mechanism to make annual giving to the charities you already support easier?

2. What value do you place on philanthropy?

  • Does philanthropy play an important role in your life now?
  • How much time would you like to spend engaging in philanthropic pursuits?
  • Do you anticipate that your charitable giving will increase, decrease or stay the same over time?

3. How do you want to involve your family?  

  • How much control do you want other family members to have over where money is donated?
  • Are you interested in using your philanthropy as a way to teach future generations about stewardship and leadership?
  • Which family members do you want to include?

4. How much control do you want to retain?

  • Do you want to have the final say on where funds are distributed?
  • Do you want future generations to have the flexibility to change the way the funds are used?
  • Do you want to ensure that your wishes are carried out in perpetuity?

5. What amount of administrative responsibility do you wish to maintain?

  • Do you like the idea of handling the details associated with regulatory compliance, due diligence and grantmaking?
  • Do you anticipate hiring staff or others to help with administration?
  • Would you be willing to give up some control in order to decrease the number of administrative tasks you are responsible for handling?

6. How will you fund your philanthropy?

  • Are you planning to use an ownership interest in your family-owned business?
  • Are you anticipating a liquidity event?
  • Will you use an asset that you ultimately want to leave to your children?
  • Will the assets used to fund your philanthropy change from year to year?

These are just a few of the common questions we explore with our clients. In our experience, each family’s path to meaningful family philanthropy is different. If you want to brainstorm ways to take your family’s giving to new heights, we are available to discuss these and other topics related to charitable giving at your convenience.

Investment CycleFamily foundations that distribute grants to worthy charitable organizations to accomplish their philanthropic goals are a familiar part of the charitable landscape. While grant making is an important part of the work of family foundations, it is not the only tool in a family’s philanthropic tool kit. A family foundation may also invest its assets to accomplish its charitable goals using a range of investment vehicles that are often referred to as “impact investments.”

The term “impact investments” means different things to different people, and people use it to refer to a variety of investment vehicles. In general, impact investments are different from more traditional investments because they take into consideration (to varying degrees) the social or environmental risk or impact of a given investment. Compare this to a more traditional investment model that looks to generate competitive returns based on profit maximization, without taking into consideration social or environmental concerns. In a traditional model, a family foundation focused on saving the “Crumple-Horned Snorkack” would not take into consideration whether its investment portfolio invests in companies that might contribute to the endangerment of the Snorkack. The foundation would invest to generate competitive returns and to maximize profit, and use that profit to further its charitable work.

The traditional investment model described above has certainly stood the test of time. However, some family foundations have sought out different investment models that seek to generate both financial and social/environmental returns, outcomes or impact. Generally, such family foundations are motivated by a desire to deploy part or all of the principal assets of the foundation, in addition to its grant making dollars, in furtherance of the family’s charitable mission. When engaging in impact investing, the governing body of the family foundation must determine those investment policies that are most sensible for that foundation in light of its mission, its tolerance for risk, and applicable state and federal law.

Impact investment models may involve the use of negative screens, where investments with high environmental, social or governance risks (or other risks of particular concern to the family) are screened out. Using the example above, the family foundation focused on saving the Snorkack would take into consideration the impact the companies it chooses to invest in have on the Snorkack habitat. Another strategy used, perhaps in tandem with the negative screens discussed above, is positive screening, where investments are specifically selected because the companies involved have integrated social and environmental concerns into their business models. Again, the exemplar foundation discussed above would use positive screens to make investments in companies with practices that demonstrate a positive impact on the protection or preservation of Snorkack habitat.

Family foundations might also make direct investments in for-profit or nonprofit organizations to accomplish their philanthropic goals through program-related investments (PRIs). PRIs are specifically defined in the federal tax code – and have been since 1969. Many foundations have been using PRIs to further their charitable purposes for a long time. To qualify as a PRI, the primary purpose of the investment must be to accomplish the foundation’s charitable purpose; the production of income may not be a significant purpose. For example, a foundation might make an interest-free loan directly to an economically disadvantaged individual to attend college. Or, a foundation focused on revitalizing a severely blighted urban area might provide an incentivizing loan to a for-profit business to establish a new plant in that area. Family foundations might also make direct investments related to their missions that do not qualify as PRIs (e.g., if the profit motives behind the investment are significant or if the charitable purposes are less than primary). These mission-related investments (MRIs) may be made primarily for charitable purposes or for dual purposes – both financial and charitable. Specific rules apply to determine whether an investment qualifies as PRI or whether an MRI could jeopardize a foundation’s ability to carry out its charitable purposes. When considering whether impact investing is right for your family foundation, we recommend that you consult with legal counsel to help ensure that the foundation complies with applicable state and federal law.

As a final note, some foundations are trying to maximize the impact of their charitable dollars by spending down their assets during the founders’ lifetimes. Generally, a private foundation must spend annually a minimum percentage of its money or property in furtherance of its charitable purposes. However, a foundation may choose to spend more than the minimum distribution amount each year. The governing body of the foundation should set an appropriate spending policy (and related investment policies) that aligns with its mission. For example, a foundation that has set an ambitious goal of eradicating a particular blight on society may choose to spend down its corpus to maximize the impact the foundation has in a short period of time. However, for other goals, it might be preferable to maximize the time period during which distributions are available or to stabilize a stream of funding over time.

This article is not intended to express an opinion about what investment model might be right for a specific family foundation. Rather, the purpose of this article is to shine a light on some of the ways in which your family foundation might seek to accomplish its charitable goals. Please contact us if you would like to discuss these or any other methods to achieve your philanthropic objectives.