Private Family Foundations

Posted by   admin on    December 2, 2005

Private Family Foundation: Venture Capitalism at Its Best

Is it the winter holiday season, or is it me? Last months newsletter about philanthropy and the use of charitable remainder trusts was quite popular with my readers. And, Im not the only one writing about this topic. In fact, the November 28th issue of Barrons featured the growing interest in philanthropy since the beginning of this decade 

According to Barrons: When it comes to giving, the rich are increasingly like Frank Sinatra: They want to do it their way. They want to give their money to their causes on their schedules. And they want to make sure the legacy lives on. Thats why theyre rushing to set up their very own foundations.

Over the past several months, I have been participating in a leadership program coordinated through my local chamber of commerce. The purpose of the program is to help our Greater Charlottesville community meet its need for active participation of informed and dedicated leaders. Its primary objective was to have us study challenges and issues of concern facing our community. Most of those challenges we studied involved issues of health, education and welfare. Or, to put it more clearly, issues of health, education and welfare seemed to be the best solutions to improve and maintain the well being of the community. The challenges, however, seemed more a lack of adequate funding.

Early in our nations history, churches initiated the practice of promoting public good. They used their resources to found and operate schools, hospitals and homes for orphans. During the late 1800s, wealthy families began to supplement religious philanthropy by establishing charitable trusts benefiting specific purposes. This worked quite well up until the Great Depression. When the depression hit, religious and private philanthropic resources were crippled in the face of overwhelming need. This prompted government to step in and they have remained in the business of social welfare ever since.

Yet, don't governmental programs more often resemble a band-aid than a cure?

As readers of my newsletters well know, wealth management is the ultimate goal of all that we do at ELF Capital Management. Yes, we promote our services; yet, you will find that we always seek to present thought provoking topics that are relevant to our wide audience.

This months newsletter will discuss how private foundations serve venture capitalism at its best and a brief introduction to the climate in which they operate. And, whether you find this topic of interest, or not, make sure you look over our review of the economic and investing climate for the month past, the current market outlook and our investment performance. Our investors had a very rewarding month and we won some honors!

Benefits of Private Foundations 

Private foundations are nongovernmental, nonprofit organizations organized and supported by an individual, a group of individuals, a family or a company. In contrast to a public charity, they typically have a single major source of funding (usually in the form of gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals.

It is the social, personal and financial benefits that make private foundations very special investments in the future. Unlike a direct gift, which usually benefits one recipient once, a private foundation perpetuates the donors generosity for so long as it exists.

Affecting human welfare, private foundations play a vital role in supporting social, scientific and cultural innovation. Whether you wish to change the course of things or invest your energy and skill in alleviating suffering or advancing knowledge, a private foundation can help accomplish those purposes. In this setting, philanthropy borrows some of the best practices of the venture capital world to invest in charitable ideas to build their capacity effectively. A venture philanthropist values their dollars in terms of the social return on investment. The kind of new ideas most needed by society changes over time, and a private foundation can respond to new needs as they occur.

In addition, several important personal benefits accrue to donors who establish private foundations. Many donors utilize private foundations as enduring tributes to loved ones  memorials that are not static monuments but living, changing entities. As well, some find that setting up a foundation is an effective means for organizing their charitable efforts and for regularizing the amount given. A foundation is also an orderly mechanism for giving that intervenes between the donor and potential recipients. In the case of a family foundation, most donors have found the foundation to be a stimulating and effective vehicle for teaching the next generation about philanthropy and its value to the family. In those family situations, the foundation also becomes a rallying place, an opportunity to share values and concerns for society, and a common cause for family members who might be scattered geographically.

Because a private foundation is a charitable organization, financial benefits accrue as a result of its federal income tax exempt status  although certain types must pay a 2 percent excise tax on its net investment income. Regardless, the gifts you make to establish a new foundation or grow an existing one can afford you certain tax advantages; income, gift and estate tax deductions are available under the law.

Types of Private Foundations

Every organization that qualifies for exemption under the U.S. IRS Code section 501(c)(3) is a private foundation unless it is considered a public charity. Generally, organizations that are classified as public charities are those that (i) are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, (ii) have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities, (iii) receive income from the conduct of activities in furtherance of the organizations exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities.  

Under the tax laws, private foundations are distinguished as either operating foundations or grant-making foundations. Yet, private foundations can differ greatly in design and purpose. The major types of private foundations are discussed below.

Corporate Foundation: A corporate (company-sponsored) foundation is a private foundation that derives its grant-making funds primarily from the contributions of a profit-making business. This type of foundation often maintains close ties with the donor company, but it is a separate, legal organization, sometimes with its own endowment. More often than not, these are pass-through foundations.

Pass-Through Foundation: The pass-through foundation is a private grant-making organization that distributes all of the contributions it receives each year. The pass-through election may be made or revoked on a year-to-year basis.

Corporate Giving Program: A corporate giving (direct giving) program is a grant-making program established and administered within a profit-making company. Gifts or grants go directly to charitable organizations from the corporation. Corporate giving programs do not have a separate endowment; their expense is planned as part of the company's annual budgeting process and usually is funded with pre-tax income.

Family Foundation: Approximately two-thirds of the estimated 44,000 private foundations in this country are believed to be family managed and most are of the grant-making kind. The Council on Foundations defines a family foundation as a foundation whose funds are derived from members of a single family. Ordinarily, at least one family member serves as an officer or board member and relatives may play a significant role in governing or managing the foundation throughout its life. Most family foundations are run by family members who serve as trustees or directors on a voluntary basis, receiving no compensation. And, most family foundations concentrate their giving locally, in their communities.

Grant-making Foundation: These private foundations are also known as "non-operating" because they do not run their own programs. The primary purpose, as you might guess, is to make grants. This type of foundation must distribute for charitable purposes approximately 5% of the market value of their assets each year. And, although exempt from federal income tax, they must also pay an excise tax of 2% of their net investment income each year.

Independent Foundation: An individual usually founds these private foundations, often by bequest. Sometimes individuals or groups of people, such as family members, form a foundation while the donors are still living. Many large independent foundations, such as the Ford Foundation, are no longer governed by members of the original donor's family but are run by boards made up of community, business and academic leaders. The John D. and Catherine T. MacArthur Foundation is another example of a well-known "independent" private foundation.

Operating Foundation: Also called private operating foundations, are not primarily, grant-making organizations. They operate facilities or institutions devoted to a specific charitable activity. Some conduct research while others provide a direct service by operating museums, handicapped facilities or historical sites, to name a few. The Carnegie Endowment for International Peace and the Getty Trust are examples of operating foundations.

Stand-by Foundations: These are private foundations created during a donors lifetime with a minimum or modest endowment. The concept here is that the bulk of its future endowment is planned to be received upon the death of its founding benefactor. This gives the donor the ability to organize, train and develop the foundations directors, trustees and / or managers before large sums are involved.

Concluding Thoughts

As you might have guessed by now, establishing a private foundation is akin to running a business. In fact, there are significant administrative, legal and financial considerations to consider. Yet, like any business, it takes consistency and focused effort to make an impact and build success.

Not everyone should consider establishing a private foundation. Yet, there are far more needs in our country than will ever be met. Therefore, if you have the capability to establish or support a private foundation, and the desire to do good, I know of no better way to have impact not only on your own time and place, but on the future as well.

ELF Capital Management Investment Performance Update

Did you ever see Martin Scorseses 1980 black-and-white film biography of boxer Jake Lamotta? LaMotta, as portrayed by Robert De Niro  one of my favorite actors, was a man tormented by his temper and jealousy. But in the boxing ring, his greatest athletic talent was his ability to withstand punishment. When I think of how resilient our US economy has been  to Fed interest rate increases; to rising oil and energy prices; and to the recent hurricane shocks  I cant help think of that movie. By the way, my wife got to meet LaMotta, around the time the movie came out. We were younger then and living in New York City. Recalling her experience, I know shed have been happier to meet De Niro!

Equity markets finished November on a positive note. Oil and gasoline prices have fallen significantly this month and, although higher than last year, consumers appear happy and continue to spend. December is expected to be a positive month for equity markets also  so long as we continue to receive positive economic reports.

Longer term, the world economy is expected to enjoy continued growth  in the 3% range  in both 2006 and 2007. And, as has been the case for the past two years, continued US consumer spending and Chinese investment spending are expected to be the primary drivers of this growth. (Please dont think the two are not related.)

Given the strength of the economy and increasing concerns about inflation, many economists believe the Fed will continue to raise interest rates to 5% or more - at a continued measured pace  before taking a break. If history serves as an indicator, this would have negative implications for continued momentum. Also, with household debt at record highs, how long will it be before US consumers have spent down their home equity borrowings? Maybe, another year or two?

For the month ended November 30, 2005, our one-month performance is up 2.76%, our three-month return is up 3.83% and our one-year return is up 7.37%.

Two of our own recently received some honors: Virginia Business Magazine recognized Paul D. Hoffman, in corporate taxation, and Henry V. Kaelber, in personal financial planning, as Super CPAs for 2005. Also, Consumers Research Council of America, a Washington, DC based research organization, named Henry V. Kaelber as one of Americas Best Financial Planners for 2005-2006.

For disclosure purposes, past performance is not necessarily indicative of future results and ELF Capital Management LLC (ELF), formerly Hoffman White & Kaelber Financial Services LLC, cannot guarantee the success of its services. There is a chance that investments managed by ELF may lose a substantial amount of their initial value.

ELF is an independent discretionary investment management firm established in February 2003. ELF manages a strategic allocation of primarily exchange-traded index funds (ETFs), and may invest in other carefully selected securities. ELF may also employ hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for both individual and business clients.

The ELF ETF Strategy returns presented herein represents a composite of actual results from all client portfolios managed by ELF. Currently, it is the only composite presented by ELF and separate client account portfolio positions are substantially similar, except as may be modified for retirement plan accounts and accounts with net equity of $60,000 or less. There is no minimum account size for inclusion into ELFs ETF Strategy composite and accounts with net equity of $60,000 or less have a tendency to downwardly skew the combined results 

The performance data presented herein includes the reinvestment of dividends and capital gains; as well, ELFs ETF Strategy composite returns are presented after deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.

Copyright 2005 ELF Capital Management, LLC. All rights reserved.