Philanthropy and Family Foundations: A Practical Guide for Wealthy Families
Philanthropy works best when a family treats giving as a long term operating program. A family foundation can provide structure, continuity, and a clear record of decisions. It can also create work that outlives one donor. This guide explains how families can set goals, choose a foundation model, govern it, invest its assets, evaluate grants, and prepare the next generation. The discussion is educational. It is not legal, tax, or investment advice.
Start with purpose, not paperwork
A foundation is a tool. The purpose comes first. Families should write a short statement that explains the problem they want to address, the people or places they want to serve, and the kind of change they hope to support. A useful statement is specific enough to guide a grant decision. It should also allow reasonable updates as family interests and community needs change.
Begin with a family conversation. Ask what experiences shaped the family's giving, which issues deserve attention, and what forms of involvement feel appropriate. Some families focus on education, health, housing, conservation, faith, arts, or local economic opportunity. Others support several areas through a common theme, such as improving outcomes for children.
Separate values from tactics. A value might be fairness or stewardship. A tactic might be scholarships, operating grants, research support, or direct services. Tactics can change when evidence changes. Values should remain the anchor.
Write down boundaries early. Decide whether the foundation will make grants in one region or several countries. Decide whether family members may recommend grants to organizations where they work. Decide how the foundation will handle requests from friends. Clear boundaries reduce pressure on individual trustees and make decisions easier to explain.
The IRS describes a private foundation as a charitable organization that generally receives its support from a limited number of sources, often a family, individual, or corporation. Its tax treatment and operating rules differ from those of a public charity. Families should use qualified counsel for entity selection and compliance decisions. (Source: IRS, “Private foundations,” https://www.irs.gov/charities-non-profits/private-foundations)
Choose the right giving structure
A private foundation is one option. A donor advised fund is another. A family may also give directly to operating charities or establish a supporting organization. Each structure changes control, administration, privacy, cost, and the family's role.
A private foundation offers a board, a formal identity, and continuing control over grantmaking. It can employ staff, own property in some circumstances, and create a multigenerational platform. The tradeoff is administration. The foundation must maintain records, file an annual return, follow self dealing rules, meet applicable minimum distribution requirements, and generally make qualifying distributions each year.
A donor advised fund is a charitable account held by a sponsoring public charity. The donor recommends grants and investments, while the sponsor retains legal control. Donor advised funds can be useful when a family wants to begin giving quickly or avoid building a separate administrative operation. The family should review the sponsor's policies, fees, investment options, succession rules, and grant procedures before contributing.
Direct giving can be the cleanest choice for a family with a small number of annual grants. It keeps attention on the charity rather than on administration. It does not provide a family foundation's governance structure or public identity.
The Council on Foundations explains that private foundations are generally classified as either operating or nonoperating foundations. An operating foundation uses most of its resources to conduct its own charitable programs. A nonoperating foundation primarily makes grants to other organizations. (Source: Council on Foundations, “Types of Private Foundations,” https://cof.org/content/types-private-foundations)
Families should compare structures across a five year period. Include formation, accounting, legal work, investment management, grant administration, insurance, reporting, and the time required from family members. A structure that looks inexpensive in year one may require more staff and controls as grant volume grows.
At the very least, every single family office should have one page of governance rules in place that is at least a start, and there is no excuse not to have that very minimal level of rules in place before Day 1 of operating.
Understand the private foundation rules
Private foundations operate under a detailed federal framework. The foundation must file Form 990-PF each year, even when it has little activity. The filing reports assets, income, grants, expenses, officers, trustees, and certain transactions. The public can inspect these returns, so families should write descriptions that are accurate and professional.
The IRS generally requires a private nonoperating foundation to make qualifying distributions for charitable purposes. The calculation is based on investment assets and permitted adjustments. A foundation that distributes too little may owe an excise tax. The exact calculation is technical and should be prepared by a qualified adviser.
Self dealing rules are especially important. A foundation generally cannot buy from, sell to, lease property with, lend to, or provide certain benefits to a disqualified person. Disqualified persons can include substantial contributors, foundation managers, certain family members, and related entities. A well designed conflict policy helps trustees identify issues before a transaction occurs.
Grantmaking also requires diligence. A grant to another U.S. public charity is usually simpler than a grant to an individual, a foreign organization, or an entity that is not publicly recognized as charitable. Special procedures can apply, including expenditure responsibility or equivalency determinations. The foundation should document the basis for each grant and keep reports required by its policies.
The IRS states that private foundations are subject to excise taxes on net investment income and may face additional taxes for prohibited acts, including self dealing and failure to distribute income for charitable purposes. (Source: IRS, “Private foundation excise taxes,” https://www.irs.gov/charities-non-profits/private-foundations/private-foundation-excise-taxes)
These rules are manageable when they are built into the operating calendar. They become risky when a family treats the foundation like a personal checking account or an informal committee.
Build governance that can survive family change
Good governance gives each generation a defined role. The board should have written duties, meeting schedules, voting rules, committee responsibilities, and a process for recording decisions. Trustees should receive the same information before a vote and should leave the room when a conflict requires recusal.
Many families use a board that includes family members and a small number of independent directors. Independent directors can add subject knowledge, local perspective, and a clear voice when family preferences differ. They should be selected for judgment and relevant experience, not for status.
Create a trustee job description. It should cover preparation, attendance, grant review, confidentiality, conflicts, oversight of investments, and participation in succession planning. New trustees should receive an orientation packet with the mission, governing documents, recent grants, financial statements, investment policy, and compliance calendar.
Set term and age policies with care. A fixed term can create room for new leaders. A retirement age can make succession predictable. Families may also create advisory roles for younger members before they become voting trustees. The right design depends on family size, geography, and the foundation's workload.
The National Center for Family Philanthropy recommends that family foundations use explicit governance practices, including clear roles, agreed decision processes, and planned leadership transitions. (Source: National Center for Family Philanthropy, “Family Foundation Governance,” )
A written succession plan should identify who can serve as trustee, how a chair is selected, how emergency decisions are made, and what happens if the family no longer wants to operate the foundation. Planning before a crisis protects the mission and the relationships around it.
The best way to mitigate this risk if you are exploring the multi-family office model is to obtain a clear understanding of all the anticipated expenses, challenges, and headaches that go with launching a multi-family office.
Invest assets to support the mission
A foundation's investment policy should connect the portfolio to its grantmaking horizon and risk capacity. The policy can define spending targets, liquidity needs, diversification, permitted investments, delegation to managers, and review procedures. Trustees should understand who has authority to hire, fire, and monitor investment professionals.
The foundation may need cash for grants, operating expenses, and a reserve. Illiquid investments can make those obligations harder to meet. A portfolio that is appropriate for an endowment with a long horizon may be inappropriate if the foundation expects a major multi year grant commitment.
Mission related investing can be considered when it fits the foundation's purpose and risk controls. Program related investments can support charitable activities and may count toward qualifying distributions when they meet applicable requirements. The foundation should document the charitable purpose, underwriting process, expected return, and monitoring plan.
Families should also decide how to evaluate environmental, social, or governance preferences. A policy should state whether these preferences affect manager selection, shareholder engagement, exclusions, or private investments. The board should review results using the same discipline applied to any other investment decision.
The IRS explains that program related investments must primarily accomplish one or more charitable purposes and cannot have significant investment income as their primary purpose. (Source: IRS, “Program-related investments,” https://www.irs.gov/charities-non-profits/private-foundations/program-related-investments)
Investment oversight belongs to the board even when management is delegated. Trustees should receive understandable reporting on performance, fees, liquidity, exposure, and compliance with the investment policy.
Use evidence when selecting grants
A grant application is only one source of information. Families should learn how an organization defines its work, measures progress, listens to beneficiaries, manages money, and responds when a program does not work as planned. A site visit or conversation with program staff can reveal more than a polished proposal.
Ask for a clear budget. Review revenue concentration, cash reserves, debt, major restrictions, and the relationship between program spending and administrative costs. Ratios can provide context, but they do not measure effectiveness on their own. A small organization may have higher overhead because it is building basic systems. A large organization may have lower ratios while delivering weak results.
Set expectations in the grant letter. State the purpose, amount, payment schedule, reporting date, and any restrictions. For multiyear grants, agree on what information the foundation needs and what flexibility the charity has to move funds as conditions change.
Evaluation should match the grant. A small local grant may need a short narrative and a financial update. A large multiyear program may justify baseline data, milestones, independent review, or beneficiary feedback. Avoid demanding reports that consume more staff time than the grant can support.
The Center for Effective Philanthropy reports that nonprofit leaders often value funders that provide clear communication, trust, and flexible support. (Source: Center for Effective Philanthropy, “Nonprofit Voice Project,” )
Families can improve grantmaking by reviewing a portfolio rather than judging every grant in isolation. Look at the mix of core support, capacity building, advocacy, emergency aid, and experimental work. Keep a record of what the family learned and how that changed future decisions.
Plan for family participation and learning
A foundation can teach judgment, humility, and responsibility when younger members receive real work. Give them defined assignments, such as researching an issue, interviewing a nonprofit leader, reviewing a budget, or presenting a grant recommendation. Pair responsibility with training and feedback.
Do not force every family member into governance. Some may prefer volunteer work, direct giving, or a different career. Participation should be meaningful, not ceremonial. A family can preserve shared values without requiring identical interests.
Use annual retreats to review the mission, grant results, finances, and family dynamics. Include time for disagreement. A board that never records dissent may be avoiding useful information. The chair should make space for quieter trustees and ensure that decisions are based on the foundation's purpose.
Consider a written family philanthropy agreement. It can describe expectations for confidentiality, service, conflicts, public statements, and the use of the family name. It can also explain how the family will revisit the mission as circumstances change.
Philanthropy can expose differences in wealth, privilege, religion, politics, and personal experience. Those differences should be handled with respect and clear process. The goal is a durable institution that serves its charitable purpose while preserving healthy family relationships.
What the MultifamilyOffices directory shows
Our MultifamilyOffices directory provides a useful view of firms that may support families with philanthropic planning, foundation administration, investment oversight, and related work. The directory includes 1,760 firms. Of those, 292 have published SEC Form ADV figures captured in the directory, using each firm's reported ADV date.
Among those 292 firms, reported assets under management have a median of about $921 million. The 25th percentile is about $358 million, the 75th percentile is $3.08 billion, and the largest reported figure is about $117.5 billion. These figures describe the firms in the directory with published ADV data. They do not represent the assets of family foundations or the full wealth managed by every listed firm.
The same ADV subset includes 107 firms reporting charities as a client type. It includes 207 reporting financial planning, 213 reporting selection of other advisers, 141 reporting institutional portfolio management, and 126 reporting pooled vehicle portfolio management. Fee models vary. The directory records 289 firms reporting a percentage of assets fee, 209 reporting fixed fees, 110 reporting performance based fees, and 95 reporting hourly fees.
Use directory data as a starting point for research. Confirm a firm's current Form ADV, services, ownership, conflicts, custody arrangements, and fee schedule before engaging it. A firm's experience with high net worth individuals does not by itself demonstrate experience with private foundations, charitable entities, or multigenerational governance.
Source for all directory figures in this section: MultifamilyOffices.com directory, SEC Form ADV figures as captured in the directory.
A practical first year checklist
Months one to three: agree on the mission, define the geographic and issue focus, compare structures, and identify the people who will serve as trustees or advisers. Ask counsel and an accountant to outline formation, reporting, and prohibited transaction requirements.
Months four to six: adopt governing documents, a conflict policy, an investment policy, a grantmaking policy, and an annual calendar. Open appropriate accounts, establish approval limits, and select service providers. Build a grant pipeline from community research and direct conversations.
Months seven to nine: review initial grant recommendations, document due diligence, approve grants, and set reporting expectations. Confirm that the foundation has adequate cash for grants and expenses. Train trustees on their duties and on the foundation's records.
Months ten to twelve: review grant results, portfolio performance, fees, and trustee participation. Record lessons. Update the next year's priorities and budget. Schedule the annual tax filing and board meetings before the new year begins.
At every stage, keep the operating model proportional. A family foundation should be serious about stewardship without becoming an administrative project that distracts from the people and communities it exists to serve.
Key takeaways
- Define the family's charitable purpose before choosing a foundation or donor advised fund structure.
- Use written governance, conflict, investment, and grantmaking policies from the beginning.
- Treat IRS compliance, annual reporting, and self dealing rules as recurring operating responsibilities.
- Match grant diligence and evaluation to the size, risk, and time horizon of each grant.
- Give younger family members meaningful roles while allowing different levels and forms of participation.
FAQs
What is the difference between a private foundation and a donor advised fund?
A private foundation is a separate charitable entity governed by its own board. A donor advised fund is a charitable account held by a sponsoring public charity. The donor recommends grants, while the sponsor retains legal control. The better choice depends on the family's desired control, administration, privacy, succession plan, and giving volume.
How much money does a family need to start a private foundation?
There is no single practical threshold that fits every family. The decision should account for expected annual grants, administration, investment costs, governance time, and the family's desire for a continuing institution. A donor advised fund or direct giving may be more efficient for a smaller or less complex program.