Broker Check

What Private Foundations Could Teach You About Being a Better Philanthropist

January 05, 2024

KEY TAKEAWAYS:


  • Be clear on your philanthropic principles and goals—and
    write them down.
  • Select trustees who share values similar to yours.
  • Smart moves with private foundations can also help
    donors who use other giving methods.

Many of the Super Rich—people with a net worth of $500 million or more—are often looking
to use their wealth to create good in the world through philanthropy. What’s more, their
wealth can potentially give them the ability to harness the power of private foundations—
independent legal entities that typically give donors a high degree of control and organization
over their charitable giving efforts.
But navigating the world of private foundations can be tricky. Even the Super Rich sometimes
overlook important issues related to giving via a private foundation.
The good news: The following information can potentially help you with your own charitable
giving plans and actions—even if you’re not at a private foundation level of wealth at the
moment.

The important issue of donor intent

When wealthy individuals set up private foundations, they usually have a philanthropic
agenda—commonly referred to as donor intent—in terms of which charitable causes the
donors want their wealth to support. That donor intent can run the gamut from cancer
research to an alma mater, from liberal organizations to conservative causes.
But over time, that donor intent can be lost—that is, the private foundation eventually stops
committing money to the type of charitable causes that the donor would have wanted. 

Instead, the foundation starts supporting charitable causes that may be out of line with the
donor’s wishes.

How can such an outcome happen? A key reason we see for divergence from donor intent is
that sometimes donors fail to clearly set out their philanthropic principles. When a foundation’s
creator dies, the money in the foundation can end up being allocated in unexpected ways
that the founder never intended. The highly conservative business owners’ wealth might be
donated through their foundations to liberal groups with goals that the entrepreneurs may
not have agreed with.
Perhaps the easiest way to establish donor intent is for a private foundation creator to give
while he or she is alive and in personal control of the foundation. The foundation can also be
set up with a sunset provision to reduce the possibility that the contributions will go in an
undesired direction down the road. A sunset provision is a specified time—perhaps in three
or four generations—when the foundation will be required to give away all of its money.
That said, most people tend to want their foundations to be set up in perpetuity. In that case,
here are two ways to help better ensure charitable intent is followed:

• Have a mission statement. Say you create a private foundation. You’ll want to clearly
define your philanthropic mission, specifying in writing the charitable causes and
organizations you favor, and the ones you do not.


• Choose trustees and staff who share your philanthropic values. Our experience
working with the Super Rich suggests that donor intent is more likely to be preserved
when people involved in managing the foundation are in sync with your own philanthropic
principles.
Let’s examine each option more closely

The mission statement

To increase the probability that your philanthropic agenda will be maintained, you will likely
need a mission statement.


It’s usually best if the mission statement is incorporated into the founding documents of
a private foundation. Your mission statement serves to institutionalize your intentions so
other people are explicitly aware of the charitable direction you set out, and can follow it.
The better you are able to delineate your philanthropic agenda in your mission statement,
the more likely it is that your private foundation will give your money away as you would have
if you were still around to do so.


For example, it can prove very useful to communicate your mission statement to other
people, including:

• Your family


• The trustees and staff of your private foundation


• Anyone who is involved with, or who might become involved with, your private foundation


That said, it’s not always easy to construct a powerful mission statement. In fact, it can be a
surprisingly time-consuming endeavor.


That’s partly because producing a high-quality mission statement is usually a learning
process for many philanthropists as they conduct their giving over time. As they give more
money to charitable causes and see the outcomes, donors commonly refine and further
clarify their philanthropic agendas. In other words, one of the best ways to gain clarity on
the rationale behind your giving is to use your private foundation and give regularly. As you
become clear and precise about your charitable giving, you are better able to produce a
well-thought-out mission statement.


Make sure your mission statement is well written. Avoid ambiguity and any confusing
language that others could misinterpret. Spell everything out as exactly as possible.


A mission statement might also include your reasons for establishing a private foundation
as well as how your charitable giving is actualizing specific values and objectives that are
important to you. Some philanthropists even provide supplemental material to help other
people understand what they want to accomplish charitably. Examples include:


• Legacy statements that are essentially more extensive mission statements. These might
include aspects of your past that you feel shaped your philanthropic agenda.


• A video explaining in detail what you expect to happen—the types of grants that will and
will not be made, for example—when you are no longer here.


• Diaries detailing your giving. You might write about the grants you’ve made and why you
made each one—as well as the reasons why you chose not to make certain grants.


The upshot: The more you can effectively communicate what you expect your private
foundation to do when you are no longer calling the shots, the more likely it is that your
charitable agenda will be carried out.

Choosing trustees and staff

Carefully selecting your trustees and support staff can also potentially increase the likelihood
that your philanthropic wishes and preferences will be followed.


These individuals should be highly competent, of course. But they should also share your
values and worldview. In many respects, you may be best served when you make your
decisions based on character, philanthropic views and sense of commitment.

One way to evaluate the quality of trustees and staff is to work with them as you make grants
from your private foundation. That can give you a front-row seat to see how they perform on
the job. There are other advantages to this arrangement, too. For example, smart trustees
may be able to help you refine and improve your philanthropic agenda.


You’ll also likely want to consider a method for setting up a board of directors and how future
board members will succeed current board members. We have found that many wealthy
philanthropists like to have age diversity on their boards, for example.


Lessons to learn


Clearly, making the right moves can potentially be very beneficial when dealing with a private

foundation. That said, you can get value from this advice if you make charitable contributions
through a trust or another vehicle (such as a donor advised fund).


Example: Regardless of how you give, it can be helpful to understand and communicate your
charitable expectations and the principles behind them. That way, you remain clear on your
own objectives—as do the important people in your life who might one day need to make
decisions for you. In short, you don’t need hundreds of millions of dollars to have an effective
mission statement about your philanthropic values and goals.


Likewise, selecting a trustee is an important concern if you gift via a charitable trust.
Assigning oversight roles to capable and trustworthy people can potentially help you do a
better job of turning your charitable vision into reality—and have a bigger impact.


Contact your financial professional to discuss your possible charitable planning needs and
how to best address them.