The Growth of Private Foundations
May 27, 2010
A significant trend has been occurring within the philanthropic community.
When considering the source of charitable gifts within the United States, approximately $300 Billion (US) is given away each year. Of this total, about 12% is given from private foundations. This percentage has been steadily growing, particularly showing a steep increase in the last 5-10 years. Why is this so?
A superficial analysis of the data would suggest that private foundations are becoming more generous. Unlikely, since they prudently and rarely distribute no more than their required 5% each year.
Perhaps because of wise investments, their corpuses have grown, thus creating more charitable distribution. Again, not so. While some foundations have experienced growth through exceptional investments, operating in a level market cannot alone explain this dramatic increase.
The real reason for growth in foundation giving then becomes clear. And it’s quite simple. More private foundations are being created.
Now, for the strategic question: WHY?
Of course we’re all aware of the traditional reasons individuals establish private foundations, such as:
• Establishing a legacy
• Ensuring charitable giving following one’s death
• Retaining control of future charitable gifts
• Increased social standing
• Issues relative to taxes
When considering these traditional reasons, it is interesting that each and every one of these priorities can be accomplished equally well through an outright bequest to charity. In fact, gifts to a public charity are generally viewed as a much better tax-avoidance tool than gifts to a private foundation.
So there must be some other reason. I’d like to offer an additional thought which is seldom discussed:
Individuals generally do not trust public charities with their gifts of accumulated wealth. There. I said it.
In fact, I would contend that this mistrust is so deep, that wealthy individuals would rather create testamentary private foundations not currently in operation, than to give that same gift to a well-run charity.
Why is that? Well, charitable organizations are not created to manage wealth or to save and invest money. Whereas, a private foundation accomplishes exactly that.
In addition, donors are acutely aware of all the horror stories where a generous bequest ultimately hurts the charitable organization it was intended to help. For example, rather than using one-time sizable bequests for endowment growth, organizations might artificially expand their programs. Moreover, internal arguments over the money can create conflict, strife, and disharmony which needlessly distract the organization from fulfilling its mission. (Sounds a bit like what happens with sizable inheritance gifts to children and grandchildren, doesn’t it?) So donors create a private foundation to ensure this won’t happen.
Further, other smaller-level donors might learn about a generous bequest and conclude that the organization they support no longer needs their money. Now they’re rich! And now other philanthropic dollars can be diverted to different priorities. Whereas outright bequests might be inhibitors to leverage additional gifts, private foundations usually lead the way in inspiring others to give.
What can not-for-profit organizations and their leaders do to help with this? Let me offer a few suggestions. First, I would encourage charitable organizations to encourage their donors to create private foundations. Huh? You read that right. For too long, we’ve been in competition with our donors’ intentions. Rather than trying to talk them into doing something that WE want them to do. Let’s help them accomplish what THEY want to. If you do this, I can almost certainly guarantee that your donor will become more generous to your organization – both now and through their estate.
Second, continue to educate your donors and the financial services industry. Sometimes, individuals establish a private foundation simply because they are not fully aware of the various structures and systems available within public charities. To some degree, the financial services industry assumes that every donor with the financial means to create a private foundation is interested in doing so. Maybe. But maybe not.
Finally, continue to market your charity as a “safe place” for your donors to invest. Demonstrate the ability for your organization to use donor resources – particularly estate gifts – prudently. Become transparent with the various protocols and procedures to ensure that gifts are used exactly as their donor desires. Educate your Board about the importance of this issue to your donors. Consider establishing a supporting organization or a sister “foundation” to aid your donors in accomplishing their goals.
I anticipate the trend of numerical private foundation growth to continue. Rather than lamenting it. Rather than fighting it. Let’s embrace it, and have it become a pillar to the overall transformation of the philanthropic marketplace.
Mick Koster
May 31, 2010 at 4:52 pm
Well said, Mick – An organization achieves its goals by helping the donor achieve his/her own goals. I think you may be onto something. To do that right would require creativity, know-how and courage. And, I was glad to see your “safe place” statement at the end. This is also necessary. Unfortunately, it seems that some charities in crisis have done the opposite, perhaps in an attempt to cut costs (by reducing communications, etc.) or to avoid alarming their supporters.
May 31, 2010 at 10:22 pm
Interesting speculation about the growth in private foundations. I’m wondering why donors who don’t want to leave direct bequests aren’t taking advantage of community foundations.
What do you think?
June 1, 2010 at 2:17 pm
An excellent point about community foundations. When positioned properly, a community foundation can act as a perfect “go-between” of an individual and their favorite charity or charities. And as a public charity, a community foundation can often offer better tax incentives and start-up costs than a traditional private foundation.
I’m also seeing many individuals who start a private foundation, also have a “sister” donor advised fund at their local community foundation. And community foundations who do an excellent job with customer service to their donors, often find that the donor eventually rolls the private foundation assets into their community fund account.
In general, the community foundations who operate the way community foundations are SUPPOSED to operate tend to see an influx in new funds and gift expectancies. The community foundations who don’t . . . don’t!
June 1, 2010 at 2:05 pm
A rather timely topic for our organization. I recently visited a donor in California who had previously informed us of a $250,000 bequest intention. He told me that he is working on establishing a private foundation that he intends to initially fund with better than $1 million. Our university will be one of the major recipients of gifts from the foundation, as will some other organizations that are near and dear to him. We will lose the bequest as he plans to place his entire estate into the foundation.
We are missing out on a bequest, but will be long term recipients of gifts from the foundation, which eventually will total more than the value of the bequest. The primary moitivator for the donor was not that he is unhappy with us…far from it. He still wants his alma mater to benefit from his estate, but over his lifetime has built relationships with other non-profits that are important to him, and he wants to see that they are taken care of.
He thought I’d be disappointed when he told me about the foundation. I was actually very happy for him because he is creating a legacy that will preserve his memory in the minds of the organizations that were meaningful to him during his lifetime.
June 1, 2010 at 2:27 pm
Congratulations, Dennis! I’m reminded of one of my favorite planned giving axioms: “Given enough time, the USE of money will always exceed the original corpus.”
I’d contend, however, that you’re NOT missing out on the bequest. It’s just getting structured differently. I’d also predict that you’ll see this donor’s lifetime gifts begin to increase – both to your university, and to his other favorite organizations.
This is a great example. I might steal it for a future presentation!