Creating a Private Foundation: The Essential Guide for Donors and Their Advisers / Edition 1

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Imagine all you'd like to accomplish with your philanthropy. Now picture a large portion of your resources never reaching their intended use due to poor strategies, mismanagement, or unnecessary taxes.

Today the opportunities in the philanthropic sector are greater and more varied than ever. Private foundations, which offer several estate and tax-planning advantages as well as unparalleled donor control, have become the vehicle of choice for more than sixty thousand individuals and families—and may be ideal for you.

Creating a Private Foundation introduces the issues you need to understand and gives the big picture on how foundations work. It tells you exactly what is involved for you, for the causes you care about, for your finances and taxes, and for your heirs.

Chapters address the practicalities as well as the implications of founding, funding, organizing, and operating an effective foundation, including growing its endowment, allocating its assets, and selecting professional foundation management help. Roger Silk, James Lintott, and their colleagues, leaders in the foundation consulting arena, have pooled their wisdom in this comprehensive guide for donors and your advisers. If you're looking to make a difference, there is no better guide.

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Editorial Reviews

Soundview Executive Book Summaries
Creating a Private Foundation
The experts from Sterling Foundation Management have compiled a complete guide for those who donate to charity and their advisers. To help donors save tax dollars and take advantage of the opportunities available in charitable giving, the authors provide financial planning advice that includes the proper ways to set up and manage a foundation as well as guidance on building an endowment and allocating assets. The authors also explain grants and tax and legal hazards. Copyright © 2003 Soundview Executive Book Summaries
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Product Details

  • ISBN-13: 9781576601365
  • Publisher: Wiley, John & Sons, Incorporated
  • Publication date: 6/19/2003
  • Series: Bloomberg Financial Series, #47
  • Edition description: First Edition
  • Edition number: 1
  • Pages: 226
  • Product dimensions: 6.40 (w) x 9.52 (h) x 0.78 (d)

Meet the Author

Roger D. Silk, PhD, CFA, is chief executive officer of Sterling Foundation Management, LLC. A leading expert in the field of private foundations, he has written articles that have appeared in magazines such as Estate Planning, Philanthropy, Trusts and Estates, Investment Advisor, Journal of Financial Planning, and the Journal of Personal Financial Planning. He is currently a director of several charitable organizations, including the George Mason University Foundation.

James W. Lintott, Esq., is chairman of Sterling Foundation Management, LLC. Previously, he was head of one of the nation’s largest private foundations. Mr. Lintott serves on the boards of a number of nationally known charities, including the Children’s National Medical Center in Washington, DC.

Christine M. Silk, PhD, has written on a wide variety of subjects, and her work has appeared in numerous magazines and newspapers.

Andrew R. Stephens is an attorney with extensive experience in foundations.

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Read an Excerpt

Creating A Private Foundation

The Essential Guide For Donors And Their Advisers
By Roger D. Silk

Bloomberg Press

Copyright © 2003 Sterling Foundation Management, LLC
All right reserved.

ISBN: 1-57660-136-6

Chapter One

Philanthropy 101: The Basics of Charitable Giving

You need no special knowledge to write a check to charity. But if you are a serious philanthropist, someone who wants to have an impact, to take advantage of tax breaks, and to exercise control you need to know how the system works. Specifically, you need to know about the ways in which you can give to charity.

Charitable vehicles are legal structures that make effective charity possible. For people who are new to the world of philanthropy-and some who aren't so new-the range of charitable instruments can seem overwhelming. The first step in understanding them is to review all of the options with their advantages and disadvantages. In this chapter, we will look at four approaches to philanthropy: direct gifts, supporting organizations, donor-advised funds, and private foundations. We'll examine two other popular vehicles, charitable lead trusts and charitable remainder trusts, in greater detail in Chapter 3. Our aim is to provide a working overview of the available options so that donors and their advisers will be able to make choices appropriate for their specific situations.

Of course, we'll befocusing on the private foundation, the vehicle of choice for 75 percent of the country's wealthiest four hundred families and truly the "gold standard" of charitable vehicles. To understand why private foundations work so well, it's important to know something about the other three approaches for a basis of comparison.

Direct Gifts

A DIRECT GIFT of money is the simplest, easiest, and perhaps most familiar way to support a cause. Essentially, you write a check to the charity of your choice and you're done. Large direct gifts are usually endowment gifts-money that will be held and invested by the charity or invested into "bricks and mortar." Over time, the charity will spend the income generated by those assets. For example, anyone who's attended a university at any one of dozens of U.S. schools has probably seen the name "Kresge" on a hall or auditorium. "Kresge" is the "K" in "Kmart," and the Kresge family has given large amounts to numerous schools, where the family name is now carved in stone. Kresge obviously favors using direct gifts as a means of supporting select charities and organizations. And for having buildings named after you, there's probably no better way to go.

But, direct gifts often are not the best strategy for an effective long-term program. Here's why. Once a donor makes an endowment grant, he or she may have an opportunity to advise the board of the charitable organization, but will no longer have control over how the funds are used. Charities with large endowments-classic examples being Harvard University, with an endowment approaching $20 billion at last count, and Yale, with over $10 billion-are often less than responsive to the donors who created those endowments. Yale famously returned a $20 million gift from Texas billionaire Lee Bass, saying that Bass wanted too much control over how his money was used.

Unresponsiveness is no problem for donors who don't want a lot of involvement and are willing or even happy to give control over the money they have donated to the organization they've chosen. Many donors, though, especially those whose gifts are large, want to use their donations to create and implement a specific vision or to encourage a specific project. It is important for these donors to have control.

In the best cases, donors make large endowment gifts because they conclude that doing so will put the money to the best possible use. In many cases, however, donors may be interested in the publicity, the kudos, and the goodwill that attend the announcement of such gifts. The reader may recall Ted Turner's $1 billion pledge to the United Nations in 1997. It's hard to know what really went on in Turner's mind, but it's not unreasonable to believe that favorable publicity may have factored into his decision.

It can be very frustrating to make a large endowment gift only to watch the charity change its mission or act contrary to the donors' wishes. Even having your name on the door does not guarantee that a charity will always do what you want. In 2000 in New York City, this was illustrated in an ugly and public battle between Marylou Whitney and the Whitney Museum over a work of art by Hans Haacke entitled Sanitation. Marylou Whitney, a daughter-in-law of Whitney Museum founder Gertrude Vanderbilt Whitney, was a director and member of the museum's national fund-raising committee. But when she and other family members raised objections to the planned exhibit because of the exhibit's appallingly insensitive use of Nazi iconography, the museum dismissed her concerns and proceeded to mount the show. Whitney resigned from the museum's fund-raising committee and removed the museum from her will. The Whitney was "free to associate itself with trash," she told the BBC, but she did not want people to think she approved of it. Marylou Whitney also cancelled a planned $1 million gift to the Whitney Gallery of Western Art.

Another problem with large endowments is that they can make it feasible for the people running the charity to focus more on their own positions or on raising still more funds than on the immediate needs of the charity's beneficiaries. In our view, the actions of many large, privately endowed universities in the United States are a case in point. Schools such as Harvard, Stanford, and Princeton continue to aggressively seek new funds for their endowments, and continue to raise the pay levels of senior faculty and administration, even as they continue to raise tuition at rates far exceeding the rate of inflation, without using the endowment to moderate these costs. Johns Hopkins University President William Brody, for example, received compensation exceeding $500,000 in 2001, as did Steven Sample of the University of Southern California and at least five other university presidents that year. Jon Van Til, a professor at Rutgers University, told the Chronicle of Philanthropy, seen by many as the "newspaper of record" for the philanthropic community, that such salaries often allow the people running the organizations to lose touch with the people they're supposed to be serving. James Abruzzo, who heads non-profit headhunting for the New Jersey-based firm DHR International draws the link explicitly. Many of the largest nonprofits tie executive pay to fund-raising success, he says.

Some cases of a charity actually violating a donor's intent are particularly blatant and egregious. If you haven't heard such stories, it's because they rarely reach the courts or show up in the press. Donors are too embarrassed to go public with their complaints. And even if the donors seem to have a good legal argument, it's difficult and expensive to meet the legally required standards of evidence on something as subjective as intent.

One case that did go to court involved Manhattan's St. Luke's Roosevelt hospital and a donor named R. Brinkley Smithers. Smithers dramatically influenced the treatment of alcoholism in the second half of the twentieth century. During the 1970s and 1980s, he pledged $10 million to St. Luke's Roosevelt in order to establish the Smithers Alcoholism and Treatment Center. Smithers was a strong supporter of an approach that encourages alcoholics to give up drinking entirely and to rely on group support from other alcoholics, the same approach pioneered by Alcoholics Anonymous. Smithers spent millions of dollars funding research on this form of treatment. He naturally expected the Smithers Alcoholism and Treatment Center to support his views on abstinence.

Smithers' theories were generally supported during his lifetime. But a year after he died, in 1994, St. Luke's developed an intervention clinic that accepted and supported a "controlled drinking" treatment. In addition, the hospital, heavily in debt, decided to sell the town house on Manhattan's Upper East Side that had housed the program for years. Smithers' widow Adele sued St. Luke's, but she lost, and before she could get an appeals court ruling, St. Luke's sold the building for $15.9 million. Smithers and her son were so displeased with St. Luke's that they now publicly disavow the program that bears the family name. The legal case is still pending.

As advisers, we've seen a number of similar cases up close, involving donors who felt mistreated and saw their money used in ways they'd never wanted. To protect our clients, we have removed identifying detail from these stories. But they are worth hearing.

In one case, during the 1970s, a well-known university raised $20 million from a prominent donor to finance research in a then-arcane area of finance called "derivative contracts" by a distinguished professor. When the university accepted the funds, it seemed to be in complete agreement with the donor's wishes that the money be spent on this particular area; the funds were put in a separate endowment account. Time passed, and the endowment grew. For a number of years, the research went on as intended.

But when the university changed hands in the 1990s, so did its priorities. The administration eliminated the entire research program and even the department for which the funds had been raised. A primary motive was to get their hands on the endowment funds. The donor had already died, but the finance professor, now retired, decided to fight. Over a period of several years, he expressed concerns quietly, and then made formal protests. He tried his best to gather allies against the administration, but he still hadn't made any headway when he died from a stroke in 1997. The assets were commingled with the endowment of the university.

In a second case, which also involves a university, a donor agreed to endow a chair for an economics professor. Endowed chairs, which establish a named professorship in a given field, are a staple of university fund-raising. They are created by universities as a fund-raising tactic, or by a donor who wants his/her name associated with a chair in exchange for funding. Perhaps the most famous is the Lucasian chair in mathematics at Cambridge University, now held by Stephen Hawking and once held by Sir Isaac Newton. That chair was created in 1663 by a gift of land from a Member of Parliament named Henry Lucas. The land yielded £100 a year, which was a lot of money in those days. These days, it costs a lot more than £100 a year to endow a chair. The price varies from school to school and even department to department, but it generally runs into six or seven figures. (The price may be negotiable, although this is a fact that schools would prefer remained secret.)

In our case of the economics chair, which occurred in the late 1990s, a wealthy donor who was already a supporter of a well-known eastern school decided to give an additional $1 million to endow a chair in economics. It was up to the university to make the appointment, and it chose one of the university's well-known professors. The professor was chosen partly because of work he had done to establish an important academic organization within the university-an organization that was endowed by the same generous donor who now wanted to endow the chair.

Receipt of a chair (which is always tenured) is both an honor and a sinecure for any professor, who has a public platform and cannot be fired. In this instance, the professor started a very public attack on an academic organization supported and funded by the same donor who had endowed the professor's chair. As a result, the organization's ideology changed dramatically, and in opposition to the donor's beliefs.

The donor was furious and extremely disappointed that his intentions for the organization and for the endowed chair had gone awry. There was nothing he or the university could do. He had no choice but to live with his mistake. But it is certain that he doesn't plan to endow another chair anytime soon. In all his future giving, the donor has been careful to attach strings and fund programs only a year at a time.

Stories like these are not unusual. We urge donors to weigh decisions carefully before making endowment grants to charities, whether these charities are universities, arts organizations, hospitals, or any other large institution. If donors have no doubt that a charity will be responsive to their wishes, or accepts the idea that a charity should be free to modify its use of the funds as it thinks best, an endowment grant may be appropriate.

If you like the idea of your name carved in stone or on a plaque, and you believe in the mission of the organization and have confidence in its leadership, go ahead and make an endowment. You will be in a lot of good company. But if you want more control over the use of your money, we believe that there are better alternatives.

To encourage one-time endowment gifts, charities often tell donors that they need such gifts to ensure funding for long-term programs. In certain cases, this logic may be justified. But there are ways that a donor can arrange to provide long-term funding and still retain control. As we shall see later in this chapter, a private foundation is an ideal way to get the immediate tax benefits that come from an endowment-level gift, but still exercise the control and judgment you want (and that you believe can benefit the charities over the long run).

As you've seen, we are particularly cautious about universities. Even under the best of circumstances, in our view, universities are no longer good places to make big donations. Despite the popularity of university endowment funds, we do not usually advise large endowments for universities if a donor wants to have significant control over how that money is spent.

Supporting Organizations

ANOTHER CHARITABLE VEHICLE that can be appropriate in certain situations is a supporting organization. A supporting organization has some characteristics of a private foundation and some of a public charity. Like a private foundation, a supporting organization is a separate, freestanding legal entity. But it is often associated with a charitable organization that supplies it with certain services, such as money management and administration. The founder can often be on the board of the associated charity. However, unlike with a private foundation, the founder cannot have control. Control must rest with one or more public charities.


Excerpted from Creating A Private Foundation by Roger D. Silk Copyright © 2003 by Sterling Foundation Management, LLC. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


1. Philanthropy 101: The Basics of Charitable Giving.

2. Powers of Deduction: Tax Advantages of Private Foundations.

3. Advanced Planning: Combining Foundations with Charitable Lead Trusts and Charitable Remainder Trusts.

4. A Family Enterprise: Foundations and Children.

5. Carpe Diem: Set Up a Foundation While You're Still Alive.

6. Effective Foundations: The Business of Philanthropy.

7. The Endowment: Developing an Appropriate Foundation Investment Policy.

8. Developing and Implementing a Foundation Asset Allocation Policy.

9. Compliance: The Legal Do's and Don'ts.

10. Other Planned Giving Vehicles.

11. For Advisers: Building Client Assets with Private Foundations.

12. How to Select a Foundation Manager.

13. What Can You Donate to Charity?


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