ESTATE PLANNING FOLLIES: Disappointing Results of Setting Up Family Foundations to Teach Children Philanthropy
I talk with hundreds of families each year about generous giving and wise estate planning. I can’t tell you how many times affluent parents or grandparents have said to me, “We want to set up a family foundation.” Notwithstanding the worthy causes listed in the conversation that follows, the underlying donor intent often emerges with words something like this: “We just want to teach our children about generosity and provide a means for them to be involved in giving.”
Unfortunately, it very rarely works out as parents or grandparents anticipate. Almost every family I know that has set up a perpetual-giving foundation has been very disappointed with the outcomes.
That being said, I have been involved with a number of families over the years that represent the most extraordinary examples of multigenerational philanthropy one could imagine. Below is a list of the factors that explain how a few family foundations have worked so well and why most do not.
WHY FAMILY FOUNDATIONS DISAPPOINT
1. You can’t instill philanthropic desires in the future generations by simply creating philanthropic structures. It is not uncommon for people to spend lots of time and money drafting estate planning documents with the intent of shaping (or, in some cases, manipulating) the values and choices of future generations. However, passing on accumulated wealth and passing on accumulated values are two very different things.
A sudden increase in giving capacity won’t make your children genuinely philanthropic any more than a sudden increase in spending capacity will make them content to live well within their means. The power of money (to spend or to give) simply magnifies the good or bad habits they have already developed. In other words, children without a cultivated philanthropic heart and habit will quickly grow weary of well doing; that is, weary of giving away their parents’ money.
A sudden increase in giving capacity won’t make your children genuinely philanthropic any more than a sudden increase in spending capacity will make them content to live well within their means.
2. Foundations are often set up for the wrong reasons. Acts of extreme generosity can be motivated by all sorts of intentions. Invitation and access into elite circles of society, finance, and politics can be gifted (tax-deductably) from one generation to the next by means of a well-funded family foundation. That may sound a bit cynical; however, it is a driving force behind estate planning objectives in the world of social philanthropy. If you work in the business of charitable estate planning long enough, eventually you will come across donors with this as their primary objective. That is not to say there is no charitable intent among those wishing to set up the next generation as individuals of influence through a family foundation. However, charity is (or eventually becomes) secondary to social access as the reason for the foundation’s existence.
3. The business of giving away money is very tedious work. Being able to consistently fund worthy causes through a family foundation is thrilling. However, after a few years, the reality sets in concerning the mounting work involved in wise giving. As B.B. King used to sing, “The thrill is gone…” The result is that second and third generations become less and less engaged with the business of the foundation. And, in large foundations, professionals take over. It is often at this point that foundation expenses begin to soar, and focus on original donor intent begins to fade. Originators grow more and more disappointed, and occasionally antagonistic toward the foundation.
Parents and grandparents who set up family foundations with the goal of turning their children into professional grant-makers are very often disappointed with what they have done.
4. Casual or haphazard grant-making can result in significant blowback. Family members come to realize that funding projects in a way that makes a long-term positive impact is not as easy as they had initially imagined. Throwing money indiscriminately at problems often has unintended consequences. In their book When Helping Hurts (Moody Publishers, 2009), the authors Brian Fikkert, Steve Corbett, and John Perkins explain how well-intended, but not well thought-out, philanthropy can do more harm than good. The harm ranges from creating long-term dependency to drilling a water well that starts a war.
5. Recipients will occasionally turn on family directors. Every time the directors of a family foundation say yes to one request they are declining to fund another. And, at some foundations, the number of requests can grow into the thousands. On several occasions individual donors have expressed concerns to me about how much an organization’s love and appreciation are dependent on their next gift. In a previous blog, I talked about large institutional nonprofits that over time develop an entitlement mentality, assuming that the annual grant is “their money,” and expressing great resentment when funding is reduced or discontinued. Nothing spoils the joy of giving among family members or makes them more cynical about the grant-making process, than discovering a grant recipient’s appreciation lasted only as long as funding requests were repeatedly granted.
PROFESSIONAL GRANT-MAKING IS HARD work and serious business, requiring a soft heart, thick skin, and the ability to say, “No.” It also takes a lot of experience, vision, and patience. I have very high admiration for those who do it well. However, parents and grandparents who set up family foundations with the goal of turning their children into professional grant-makers are very often disappointed with what they have done.
I personally have both a family foundation and a donor-advised fund. So as not to presume too heavily on the next generations to administrate my own stewardship, both entities are scheduled to term out in a set number of years. I like the saying, “Do your giving while you’re livin, so you knowin where it goin.”
COMING UP — Part Two, Why a Few Family Foundations Have Worked So Well.
Eddie Thompson, Ed. D.