Diving into Family Philanthropy (Segment III): Making your family foundation’s assets work as hard as its grants.

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.

Diving Into Family Philanthropy (Segment II): What giving vehicle is right for your family?

Donation CheckWe recommend waiting to choose a giving vehicle (or vehicles) until you have a clear sense of your family’s philanthropic objectives. Once identified, those philanthropic goals, in addition to tax and operational considerations, will inform the selection of the right vehicle for your family. This segment will provide an overview of a few of the most common charitable giving vehicles and how you can decide which one may be right for your family.

There is no one-size-fits-all approach to charitable planning, and often pragmatic concerns regarding administration, oversight, compliance and control come into play. Expect your advisor to be interested in your thoughts regarding the following questions:

  1. How much control do you want to retain over the way your charitable funds are used?
  2. What amount of administrative responsibility do you wish to maintain?
  3. Would you be willing to give up some control in order to decrease the number of administrative tasks you are responsible for handling?
  4. Do you want future generations to have the flexibility to change the way the funds are used?
  5. What types of assets do you think you will use to fund your giving?

There are three common giving vehicles to consider: private foundations, donor-advised funds and giving circles.

Private Foundations

  • A private foundation is a separate legally entity, and is typically funded by a single donor or a small group of donors.
  • The governing body of a private foundation, often comprised of members of the donor’s family, decides how the foundation’s funds are used to accomplish its charitable purposes.
  • As a separate legal entity, a private foundation incurs some costs that are generally not incurred by the donor of a donor-advised fund or giving circle. These include the costs of forming the private foundation, applying for recognition of tax-exempt status from the Internal Revenue Service and maintaining that exemption by complying with annual recordkeeping and filing requirements. If you are considering the creation of a private foundation, consider whether the amount you wish to set aside for charitable purposes can easily absorb start-up and ongoing administrative costs.
  • The creation of a private foundation and recognition of its tax-exempt status from the IRS may take up to several months to complete.
  • In addition, private foundations are subject to several tax rules not currently applicable to donor-advised funds or giving circles, which include: the charitable income tax deduction for a donation to a private foundation is limited to a 20-30 percent of a donor’s gross income; the value of a gift of closely held stock or real estate is limited to a donor’s cost basis for most private foundations; private foundations are subject to a 1-2 percent excise tax on all investment income; and private foundations must distribute five percent of the fair market value of their investment assets each year.
  • A private foundation may last in perpetuity, and successive generations of family members can easily be incorporated into the governance of the foundation.

Donor-Advised Funds

  • A donor-advised fund, or DAF, is a separate fund sponsored by an existing public charity.
  • One or more individuals identified as the advisors to the donor-advised fund, typically the donor and perhaps additional members of the donor’s family, may recommend how the assets of the fund should be distributed over time to any IRS-qualified public charity. Under the federal tax rules applicable to DAFs, the ultimate decision regarding how the DAFs are used must be made by the public charity and not by the donor.
  • The sponsoring public charity manages any administrative responsibilities of the DAF and evaluates qualified organizations. In addition, many sponsoring entities have geographic or subject matter expertise to assist in identifying worthwhile charities working in your areas of interest.
  • Since a DAF is housed in an existing public charity, there are few start-up costs.
  • Depending on the sponsoring public charity, a DAF may have limits on how long it may remain in existence, or may have a limit on the number of successive generations of family members that may make recommendations for how the funds are distributed.

Giving Circles

  • Giving circles come in many shapes and sizes. Generally, a giving circle is a group of individuals who pool funds, then decide as a group where to donate those funds.
  • Giving may be very informal. For example, members of a giving circle may choose to meet casually to select organizations they wish to fund. If the members of an informal giving circle wish to maintain the ability to take a charitable income tax deduction, each member should write a separate check directly to the charitable organization (or organizations) the group has chosen to fund.
  • A giving circle may be housed within a community foundation or other sponsoring entity. For example, members of a giving circle may choose to pool their resources in a fund at a community foundation, and then make recommendations about how such funds should be distributed in the community.
  • A giving circle may be a useful tool to start talking about philanthropy with your family. Children of all ages can be encouraged to contribute what they are able to the pool of funds, which can help them begin to understand the impact and rewards of charitable giving.
  • Since a giving circle may be very informal, there are few if any start-up or ongoing administrative costs.

These are by no means the only options available to you, and there are many creative options available to help you to maximize your charitable impact.

In addition to the decision you make about charitable giving, the decisions that you make about how to manage your business, invest your personal assets, volunteer your time and engage civically can all work together to help you achieve your philanthropic goals. In our experience, family businesses often already have strong practices that drive the bottom line while improving the local community. As a family business owner or advocate, you bring a unique set of skills to the world of philanthropy. We encourage you to think about the ways in which you can incorporate your valuable experience from the private sector into your charitable planning.

We are ready to help you and your advisors think through these and other issues as you start tackling your philanthropic goals.

Benefits of Family Philanthropy: A Real World Example

In our current series of blog posts, Diving Into Family Philanthropy, we are exploring the choices available to families that wish to engage in family philanthropy. In our most recent post, we discussed the benefits of family philanthropy, including:

  • teaching financial values to the next generation,
  • sharing and discussing investment philosophies,
  • establishing a training ground for future family board members, and
  • creating meaningful family experiences.

A recent New York Times article, “Giving Like a Rockefeller, Even if You’re Not Super-Rich,” about the philanthropic legacy of David Rockefeller, who died last month at the age of 101, shows a real-world example of the benefits of family philanthropy.

Multi generation meetingThrough interviews with several of Rockefeller’s children and grandchildren, the article explains how he used charitable gifts to teach younger generations of his family the values of gratitude, humility, responsibility and engagement. Younger family members were allowed to have varying degrees of involvement with the family’s philanthropic pursuits to best fit their own personal circumstances. Rockefeller also encouraged younger generations to follow their own charitable passions, which has been a key to keeping younger family members engaged. If you are interested in family philanthropy, we highly recommend reading the New York Times article.

In our next post, we will continue our series on family philanthropy by describing the different vehicles available for charitable giving, including family foundations, donor advised funds, and giving circles.

Diving Into Family Philanthropy (Segment I): What are the benefits of family philanthropy?

family giving1 – Teaching your financial values to the next generation.

Your financial values include your beliefs about how financial resources should be managed and utilized. We all have them, though we may not have taken the time to clearly articulate them to ourselves or our children. If you are reading this article, then charitable giving is likely already a part of your financial value system. Talking to your children and grandchildren about charitable choices is one way to increase the likelihood that charitable giving will also be a part of their financial value system. Consider sharing with your family the reasons you value charitable giving, how you make decisions about which charities to support, and the role philanthropy plays in achieving your financial goals.

2 – Sharing and discussing investment philosophies.

An investment philosophy is a set of guiding principles that informs and shapes your investment decision-making process. One way to share your personal investment philosophy is to set aside a pool of funds to be invested for the purpose of making charitable gifts. Consider engaging your family when you are considering the proper investment of those funds, and let members of your family make investment suggestions. This is one mechanism to share your tips for financial success without intruding into any personal financial affairs. It can help ease tensions that sometimes arise when the topic of money comes up around the dinner table and create a neutral field for lessons about investing to be passed along.

3 – Establishing a training ground for future family business board members.

Maybe you’ve identified members of the next generation who have an interest in participating in the family business, but you are concerned about whether they are ready to take on such a responsibility. Or perhaps your aren’t ready to begin business succession planning, but want to create a mechanism for members of the family to learn to work together, to engage in collective decision making and to demonstrate a commitment to a family venture. Some of our clients have used the governance of a family foundation to teach all of these lessons, in addition to those related directly to stewardship of charitable resources. However, the formality of a family foundation is not required to create this experience. A less formal family team that makes charitable gifts together around the holiday table could work just as well to start training future members of the board of your family business.

4 – Creating meaningful family experiences.

Sharing the benefit of your experience and knowledge around charitable giving as discussed above is certainly an important benefit of family philanthropy. Family philanthropy can also create powerful family memories. For example, some of our clients not only engage their families in decisions about where to make donations, but they follow up those donations with gifts of their time and talent. Each year at Thanksgiving, one family decides which charity it would like to support in the coming year. All generations contribute financially to the same organization and then plan a family trip to work side by side with that organization to carry out its charitable mission. Whether building houses in Costa Rica, serving food at the local soup kitchen, or clearing a hiking trail in the Shenandoah Valley, this family always has wonderful stories to share about time spent together.

If you are thinking about how your family can make a charitable impact in your community, or want to brainstorm ways to engage your family in your philanthropy, we are available to discuss these and other topics related to charitable giving.

Segment II of our series on family philanthropy will explore different giving vehicles. For some, family philanthropy automatically brings to mind the creation of a family foundation. While family foundations may be appropriate for some families, we will also explore other options, including donor advised funds and giving circles.

Diving into Family Philanthropy

Over the next several posts, we will be diving into the topic of family philanthropy. Since the topic is so broad, we have divided it into segments that we will cover in the coming weeks. Each segment is intended to give you food for thought as you consider the
choices available to families that wish to engage in philanthropy together. Here’s an overview:

Segment I: What are the benefits of family philanthropy?

Teaching financial values, sharing investment philosophies, raising charitable children, and creating meaningful family experiences are just some of the benefits to family philanthropy this piece will address.

Segment II: What giving vehicle is right for my family? 

For some, family philanthropy automatically brings to mind the creation of a family foundation.  While family foundations are appropriate for some families, we will also explore other options, including donor advised funds and giving circles.

Segment III: Making your family foundation’s corpus work as hard as its grants  

Grant making is an important part of the work of family foundations. However, some families are looking at ways to put their principal to work for social or environmental impact while sustaining long-term financial return. Not only is it possible to invest principal to further your charitable objectives, but families are also developing strategies to spend down their charitable assets faster than required by the IRS.

Segment IV: I’m ready to start thinking about family philanthropy, so where should I start?

In our last segment, we will provide you with some topics and questions for your family and advisors to start discussing as you begin planning or retooling your family’s philanthropic strategy.

If you are thinking about how your family can make an impact in your community, or 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.

How an Advisory Board Can Help Your Family-Owned Business

Advisory boardWhat is an advisory board?

Family-owned businesses often form advisory boards as a source of guidance. Advisory boards differ from the board of directors discussed in this prior blog post in several respects. Primarily, advisory boards guide, not govern, as they do not have legal decision-making authority. When a company is closely held, the owners of the company may select the members of an advisory board. Where ownership spans multiple generations, advisory board members may be selected by the company’s board of directors.

Why would I want one for my business?

The purpose of an advisory board is to expand the business’s circle of trust in order to gain a broader spectrum of knowledge and experience to guide the business. Many business owners view the advisory board as an opportunity to harness expertise that the business might otherwise lack. Unlike owners who serve as both executives and board members of the company, advisory board members are not focused on the day-to-day operations of the business. This distance enables them to provide an objective, strategic, and future-focused perspective in advising the business.

Advisory boards also provide family-owned businesses with a chance to hear an outsider’s perspective—a potential change of pace from the opinions of family members, long-time friends, and employees. Advisory boards can also serve as a neutral group to resolve certain issues, such as transitioning between generations and arbitrating familial disputes. An advisory board can also function as a bridge from a family board to a board with independent members. We will discuss this in more detail in a future blog.

Who should serve on an advisory board?

Successful advisory boards typically contain between three to seven members, although board size and composition should be tailored to the needs of the business and the family owners. Business owners can select individuals that have a preexisting relationship with the business, such as accountants, financial advisors, or lawyers. Family businesses may also choose other experts in the business’s industry and market. Owners should keep in mind the importance of garnering new opinions and perspectives when selecting members of the advisory board.

How do I form an advisory board?

While no formal documentation is legally required to implement an advisory board, we suggest that businesses define their relationship with the advisory board in a written agreement or policy. Some businesses may choose to adopt bylaws of the advisory board or even a charter. Regardless of form, these written documents will serve to memorialize the purpose, parameters and function of the advisory board. Additionally, the board of directors must approve the creation of the advisory board in accordance with the business’s governance documents.

A Word of Advice: Address Estate Planning Sooner Rather than Later

Family Estate planning documentEarlier last month the New York Times ran an article about basic reasons why you need to pay attention to your family’s estate planning. The article made me think of several instances where families would have benefited from having a well-thought out plan. While we are still at the beginning of the year, we want to suggest that you consider making this one of your goals for 2017.

After practicing trusts and estates law for over three decades, I probably now spend at least one-third of my time dealing with legal matters where families have not properly tended to their estate planning. Often, this results in probate-related disputes and litigation, particularly in second marriage situations and in families where grown children do not get along with one another for whatever reason.

The net result of failing to tend to estate planning matters is frequently legal and family chaos, which carries with it unnecessary emotional turmoil and family distress, inordinate conflicts and delays, and significantly increased legal fees to navigate through the matter. It is often impossible to get to the back side of this emotional experience without deep scars, bitterness, and a shallower wallet.

So, for the sake of your family and loved ones, please consider steps you can take now to avoid leaving loose ends unattended in your estate planning matters. Any of the Bradley team who practice in this area would welcome the opportunity to talk further with you about these matters.

Defining the Role of a Board Chair

Business MeetingThe prior Family Business Advocates blog post provided an overview of the different legal roles that shareholders, directors, and officers play in the intersection of ownership and management of a company, but how does a family-owned business manage the intersection of all three of those legal roles? Answer: The Board Chair (a/k/a Chairman, Chairwoman, Chairperson).

  1. What is a Board Chair?

Simply put, it’s the leader of the Board of Directors. The Board Chair sets the agenda for, and presides over, meetings of the Board. The Board Chair also acts as a link between the Board and the executive officers of the company. The bylaws of the company often determine the scope of the Board Chair’s duties and obligations.

  1. Is the Board Chair an officer, director, or shareholder?

A director, but maybe all three. As a director, the Board Chair has fiduciary duties to the shareholders of the company, but that does not mean the Board Chair cannot also be a shareholder (and often times in a family-owned business the Board Chair is a shareholder).  The bylaws may provide that the Board Chair is also an executive officer of the company; however, many argue that best corporate governance practices favor appointing a non-executive officer Board Chair in order to reduce potential conflicts of interest (among other reasons). It is also important to note that the role of the Board Chair may change over time. A company may start out with a dual CEO/Board Chair role but later bifurcate the role as the family business matures or for succession planning purposes.

  1. Who appoints the Board Chair?

The company’s bylaws govern the appointment or election of a Board Chair. Typically, the Board Chair is elected by the other directors, but a family-owned business may develop its own unique process for selecting the Board Chair. For example, the position may rotate among different branches of the family tree, allowing a subset of the directors to select the Board Chair for a specified period of time.

  1. Why does a family-owned business need a Board Chair?

Every business with a Board of Directors needs a leader of the Board, but the role of the Board Chair is particularly important in a family-owned business. In a family-owned business, the Board Chair often acts as the voice of the family in interactions with the CEO.

  1. What qualities should a family-owned business look for in a Board Chair?

In addition to knowing the company’s business objectives, the Board Chair for a family-owned business needs to understand the family and its goals, challenges, and maybe most importantly, politics. There is no one-size-fits-all approach to selecting an appropriate Board Chair, but here are a few qualities to consider:

  • Familiarity with the company’s goals and strategies
  • Sound judgement
  • Experience and leadership maturity
  • Interpersonal skills
  • Organizational skills
  • Accountability
  • Reputation in the community
  • Relationships with others
  • Forward-looking vision
  • Time and desire to take on the role

We want to hear what you think. What additional qualities would you add to this list?

The Different Roles of Shareholders, Directors and Officers in Family-Owned Businesses

Business man giving a presentationMany family-owned businesses are organized as corporations to protect the owners from personal liability for business obligations. One consequence of organizing as a corporation is the legal separation of ownership and management. In order to secure protection from personal liability and to assure effective corporate governance, it is important for family-owned businesses to manage the inherent overlap that exists in their ownership and management. This blog post provides an overview of the different legal roles played by shareholders, directors and officers.


Stockholders are individuals or entities that hold an ownership interest in a corporation. The ownership interest is represented by shares of stock. An ownership interest does not, however, give a stockholder the right to control the day-to-day affairs of the corporation. Typically, the most important right that a stockholder has is the right to vote. Voting rights provide stockholders with limited control over the corporation’s affairs by allowing them to, for example, elect the individuals that will serve on the corporation’s board of directors and approve the corporation’s bylaws. Stockholders exercise their right to vote at annual meetings or special meetings that are called by the corporation. Stockholder’s voting rights are subject to the terms and conditions set forth in the corporation’s organizational documents (i.e., articles of incorporation and bylaws) and other agreements between some or all of the stockholders.


The board of directors of the corporation is made up of members who are elected or appointed by the stockholders. Membership on the board is not usually limited to stockholders or employees of the corporation. Directors govern the corporation on behalf of the stockholders and owe fiduciary duties to the stockholders and the corporation. The board of directors’ duties usually include hiring and dismissing the corporation’s officers, establishing and assessing the overall direction and strategy of the corporation, and approving annual budgets and corporate policies.


Officers are appointed and removed by the board of directors.  Officers manage the day-to-day affairs of the corporation and carry out the policies adopted by the board of directors. The structure of management varies widely between corporations.  In many instances a single individual may serve in multiple offices. For example, many boards of directors choose to have the top manager serve as both the president and CEO of the corporation.

With this background, it is important for family business owners to review the roles that various individuals are playing within the corporation.  Over time, as a business grows and develops, changes may begin to occur organically, and corporations must consider what corresponding legal formalities need to be observed to keep pace.

A Reprieve from Proposed Regulations Related to Valuation of Family Businesses?

Gift house with bowIn December, we posted a blog discussing a much anticipated hearing held on the Treasury Department’s issuance of proposed regulations under Section 2704 of the Internal Revenue Code (sometimes referred to as the 2704 proposed regulations) that could significantly impact the valuation of interests in family-owned businesses for estate and gift tax purposes. Comments made by Treasury Department representatives at the December 1 hearing allayed some early concerns regarding the scope and impact of the 2704 proposed regulations. However, many questions regarding the future of the proposed regulations still remained after the hearing adjourned. 

Additional news regarding the future of the 2704 proposed regulations came in the first few days of the 115th U.S. Congress. New bills were introduced in the House and the Senate to prevent the Treasury Department and Internal Revenue Service from finalizing the 2704 proposed regulations. The House bill (H.R. 308) was introduced by Rep. Warren Davidson (R-Ohio) and referred to the House Committee on Ways and Means. It essentially prohibits funds from being used to finalize, implement, administer or enforce the 2704 proposed regulations. The related Senate bill (S. 47) was introduced by Sen. Marco Rubio (R-Fla.) and referred to the Senate Finance Committee.

We will continue to post updates regarding H.R. 308 and S. 47 as they progress through committee, and any activity by the new Congress and administration regarding estate and gift tax issues of importance to family business owners. Please let us know if you would like to discuss these developments and their impact on transfers of ownership interests in your family business.