Philanthropic choices

Six scenarios where foundations outshine donor-advised funds

In Short

Foundations are purpose-built for family engagement and creating a family legacy

For high-net-worth individuals who want to make fast, easy grants to public charities while getting a tax deduction for their appreciated securities, nothing beats a donor-advised fund (DAF). But charitable impulses come in many shapes and sizes, and some kinds of philanthropy – especially strategic, entrepreneurial and catalytic philanthropy – require a more extensive and flexible charitable toolkit.

Here are six things philanthropists can do with a private foundation that are virtually impossible to achieve with a DAF:

Start An Awards Program

Awards that honor past accomplishments, such as the Nobel Prize and the Pulitzer Prize, have been privately funded for many years. These are an inspiring way for an individual or family to create a legacy and establish performance standards within a specific field, like science or journalism. Awards can also spur innovation by funding ideas that will drive future progress in a particular area. An Example: a retired molecular biologist establishes an annual awards program to further the field of genomics, inviting applicants to submit bold proposals that can lead to scientific breakthroughs. 

Secure Naming Rights

Foundations have long been used to make grants in exchange for naming rights because they’re legal entities and exist in perpetuity, providing a party to the contract that will endure beyond the donor’s death to monitor the terms of the naming agreement. An Example: a business owner underwrites the restoration of a public landmark in his hometown with a philanthropic gift. A gift agreement is drafted between the business owner’s foundation and the grantee charity, specifying that the building be named after the donor’s grandfather.

Build A Celebrity Brand

Many high-profile individuals want a philanthropic platform to build and enhance their personal brand and a foundation is the perfect tool for doing so. Establishing a foundation provides a public way for celebrities to link themselves to a charitable mission they deem important. Some Examples: an actress creates a foundation to fund initiatives that provide job training to single mothers; a professional athlete uses his foundation to build a school in the community where he grew up. Additionally, foundations offer the unique ability to run direct, hands-on efforts like food drives or community clean-ups without establishing a separate nonprofit organization.

Grant Directly To People In Need

Unlike DAFs that are required to gift through nonprofit organizations, a foundation can make grants directly to individuals and families for emergency relief or hardship assistance in circumstances such as unemployment or illness. An Example: during the early stage of the COVID-19 pandemic, one foundation made more than 500 grants to individuals to people out of work in the area where the foundation’s owners had operated a business for four generations. In these cases, 100% of the grant goes to the intended recipients, minimizing the costs and time associated with giving through an intermediary. 

Offer Program-Related Investments And Loans

A foundation can also uniquely direct funds to a for-profit business as long as the business helps to further the foundation’s mission. An Example: the 2010 investment in Liquidia Technologies by the Bill & Melinda Gates Foundation to accelerate the development of vaccines. These transactions, when structured appropriately, may be treated like investments in which a portion or all of the funds are recoverable and can eventually be granted out or directed to another entity. Foundations can also offer program-related loans and loan guarantees to help recipients access capital at preferred rates and build their creditworthiness.

Engage The Family, Start A Legacy

Foundations are purpose-built for family engagement and creating a family legacy. Strategies for involving family members in their private foundation abound; here are the most common:

• Establish the foundation’s mission together. It’s an excellent time for families to collectively identify and articulate their values.

• Hire family members to work at the foundation.

• Invite family members to fill board positions so they learn about foundation operations. Boards often have specific term limits to encourage the rotation of family members and involvement of multiple generations simultaneously.

• Design the foundation to last in perpetuity so it may be handed down from generation to generation. Doing so will cement family values and relationships and create a charitable legacy.

Hannah Shaw Grove has spent three decades studying and working with high-net-worth families, family offices and their closest advisors on achieving their wealth management priorities. She is chief marketing officer at Foundation Source, the nation’s largest provider of support services to private foundations. Foundation Source works in partnership with financial and legal advisors as well as directly with individuals and families. 

©2021 Foundation Source Philanthropic Services, Inc. All rights reserved.