What happens when you assume …

… in multigenerational family foundations

Renee Sovis, 21/64 Certified Advisor

Maybe the answer to this age-old adage would be the same whether we’re discussing family foundations or not.  At any rate, the stakes are high when we’re talking about the charitable stewardship of potentially millions of dollars.

Take this scenario, for example: The family matriarch established her foundation in her lifetime and planned for it to be funded at her demise.  She appointed her two kids, their spouses, and her four grandchildren to be part of the board of directors, but left few other directions for the management of the foundation.  “They know me, they know how I would spend the funds.  I trust them to work out any issues that arise,” she assumes.  The family, however, isn’t on the same page:

“My mother was always involved at her synagogue.  She’d want us to focus on Jewish issues, here and abroad.  She would love it if we made several small gifts each year to support programming at Hillels across the state,” states the eldest son.

“Well, she told me personally that she hopes we’ll give only to her local community.  I know none of us live there anymore, but it was important to mom,” argues a daughter-in-law.

“Grandma loved her dogs more than us; she’d want us to focus on animal welfare.  Also, I’m more interested in giving large gifts that can make a big impact now.  Why wait?” says Grandchild One.

“Can I give money to my friend’s new nonprofit in Brazil?” asks Grandchild Two.

Even among the most loving and cooperative families, this is a common situation.  As a result, uncertainty and confusion can disrupt the flow of funds being directed to worthy causes.  So what’s the best way to avoid disagreements and disappointments?  It’s simple: Avoid assumptions.

Founders can avoid assumptions and enhance impact by taking a two-pronged approach.  First, it’s important to document your wishes, your interests, and your intentions.  Mission, vision, and family values are all important considerations that will give direction and purpose to your family giving.  Do you hope the foundation is perpetual, or should it sunset after a few generations? These two scenarios change the management of the foundation substantially.  Second, start giving while living, and involve the next generation (and maybe even the next) as soon as possible.  Early involvement in the family’s philanthropy from each generation will make generosity a habit and not a chore.

What does this look like and how can it be done?  Luckily, there’s no one right answer to what it might look like; it depends on your goals and where you currently lie on the continuum of giving.  It might involve talking to your young children about the importance of community, welcoming the next generation on site visits, or volunteering as a family at the local food pantry.  If you’re farther along on the continuum, the next generation may already be sitting on the board.  A thoughtful strategy will make this a successful and fulfilling endeavor for all.

And when do you start?  Now is always the best time to start.  Whether your family is already introducing the next generation to philanthropy, or your board needs more guidance and support (like our example family), a skilled advisor can help you and your family find direction and joy from your giving.  Your shared values, your philosophy about money, and your motivations for giving are all key ingredients to explore within the family foundation setting, and these conversations take time.  Again, a skilled advisor can provide guidance so that your family can avoid what happens when you assume.

Tips for the first generation:

• Start early. Set up your foundation with the next 5, 20, and 100 years in mind.  What does it look like?  Is it still around?
• Your children aren’t mind-readers.
• Be open. Understand that what the world needs may be different in a few years’ time.
• Be humble. You have much to share and a long professional career to guide and inform your decisions.  But don’t let your experience close you off to new ideas and innovation.
• Be flexible. Feedback and suggestions from the next generation will fuel the family foundation engine.  After all, the future is in their hands.

Tips for the next generation:

• Ask questions. You don’t know what you don’t know — but your elders may assume you know, you know?
• Your parents aren’t mind-readers.
• Be open. You have new and exciting ideas.  Remember to be respectful of what has been, but be responsive to new needs.
• Be humble. The first generation will have much experience and know-how.  Learn from them.
• Remember, the future is in your hands.

About the author:

Renee Sovis is vice president of Neithercut Philanthropy Advisors.  As a 21/64 Certified Advisor, she assists families and foundations with multigenerational engagement and facilitation.

Wait.  I thought endowment was permanent, but recently the New York Times reported:

Met Opera Taps Its Endowment Again to Weather Downturn

The company has withdrawn nearly $40 million in additional funds from its endowment to cover expenses, but sees signs it may be emerging from its post-pandemic woes.  [i]

Nonprofits typically seek endowment gifts and give assurance to donors that the gifts will be invested in perpetuity, and only a small percent (usually 4 or 5 percent) will be used each year.  Nevertheless, there are plenty of examples of a public charity using its endowment to pay operating expenses during extraordinary situations, such as the 2008 recession or the Covid pandemic.

So, are endowments permanent — that is, perpetually untouchable — or not?  This raises a lot of accounting and legal questions, which we won’t endeavor to answer.  Even so, an informed donor should be aware of a few issues: [ii]

1. Donor-restricted endowment and Board-restricted endowment are quite different; the latter remains in the Board’s purview to allocate for operating expenses if necessary. Donor-restricted endowment is expected to be restricted permanently, never to be spent down.
2. There are cases where donor-restricted endowment has been spent by a charity during dire circumstances. If this violates a donor restriction, is there any recourse or accountability?  A donor might sue, or the attorney general might investigate, but in practice this very rarely occurs.
3. A savvy charity might clear the spending of perpetual endowment with any donors extant or the attorney general’s office before the expense.  And a savvy donor might consult with legal counsel before making a substantial endowment gift.
4. Community foundations offer an interesting option for folks interested in supporting endowment. By creating or giving to an “agency endowment fund” at a community foundation, a donor can be assured that the fund will never be used for general expenses, even in the worst-case scenario of the charity going out of business.

In any event, donor-restricted endowment is designed to be permanent in theory, but there are times when this rule is violated.  Discerning donors interested in giving to endowment might ask a nonprofit about these issues.

[i] https://www.nytimes.com/2024/01/25/arts/music/met-opera-endowment-finances.html

[ii] Endowment defined:  The principal amount of gifts and bequests that are accepted subject to a requirement that the principal be maintained intact and invested to create a source of income for a foundation or public charity.  Donors may require that the principal remain intact in perpetuity, or for a defined period of time, or until sufficient assets have been accumulated to achieve a designated purpose.  (2019 Council on Foundations – Commonfund Study of Investment of Endowments for Private and Community Foundations.)

Call it what you will, but once again the idea of non-perpetual foundations is back in the news.  Recently, The Wall Street Journal rejoined this conversation with an article called “Philanthropists Discover the Value of “Sunsetting.”  This piece might be better titled “WSJ Discovers the Value of Sunsetting,” as the issue has been a popular one in the philanthropy world for decades.  Indeed, we have written on this issue frequently.  (See here.)

Sunset dates have many benefits, and these have been well described elsewhere.  Yet the media tends to focus on the potential for a foundation’s focus to evolve over time, and this discussion is often draped in liberal vs. conservative terms.  In our work with family foundations, we see a somewhat different issue.  Founders often want their foundation to go on forever and provide a common philanthropic enterprise for the family.  That is, the founders want to give the family purpose and to keep the bonds among family members strong — especially if the family business has been sold.  This plan works great when the children and, later, the grandkids join the board.  But add two more generations, and the second-, third-, and fourth-cousins have much less in common; did not personally know the founder; and typically don’t share the interests of the founder.  As such, we advise that you think about having a sunset date when your grandchildren are of an age when they will no longer be able to manage the foundation.

Some time ago, The Wall Street Journal reported that two of Paul Newman’s children were locked in a legal dispute with the board members of the Newman’s Own Foundation.[i]  Created in 2005, the foundation owns Newman’s Own Inc., the specialty food company that uses Mr. Newman’s name and likeness.  The profits of the food company are accrued by the foundation, which reports it has given $600 million to charities over the last 40 years.

Mr. Newman, the famed actor and entrepreneur, died in September 2008.  From the start, the profits of his salad dressing empire have been given to charities — and that practice was to continue after his demise.  But who would run the foundation?  Who would make the decisions and have the ability to direct grants?

The foundation appears to have been entrusted to two gentlemen, both friends and professional advisers of Mr. Newman’s.

Now, some 15 years after Mr. Newman’s death, two of his daughters have filed a suit in which they allege:

• Major conflicts of interest among board members.
• Lavish travel by the board and staff, including a personal driver for one board member.
• Last-minute changes relative to the foundation in Mr. Newman’s will just months before his death, when he was not competent.
• Violations of donor intent by abandoning some of Mr. Newman’s favorite charities and interests.
• A reduction in the funds promised to be made available for Mr. Newman’s children’s personal giving.
• A change in the methodology that calculates the company’s payments to the foundation.

In fairness, some of these charges stem from the behavior of one of the original trustees, who resigned after an internal investigation.  Today, the board appears to be composed of experienced leaders.

But at least some family members remain very unhappy and feel betrayed.  We presume this is not what Mr. Newman wished.

Some will see this as an issue of donor intent.[ii]  That is, they point to the professionalization of the foundation and the evolution of its focus as evidence of a drift from the founder’s intention, much like the legendary case of the Ford Foundation.  In our view, this critique may well have merit; we are big believers in donor intent.  (And in this case, both sides may think they are the true followers of Mr. Newman’s intent.)  The solution might have been to appoint family members to the board, instead of (or as well as) Mr. Newman’s professional advisers.

Yet, we also see this as an example of the fundamental difference between two different types of foundations.  Is the foundation’s purpose to focus on one issue, or several issues?  Or is its mission to keep the family together and provide a common philanthropic enterprise for Mr. Newman’s children and grandchildren?

In practice, it is difficult to mix these two paths.  If the purpose of the foundation is to help disadvantaged youth, then the foundation will likely hire the appropriate experts and its mission may expand or change as the foundation learns more and as public policy evolves.  In this case, family members may not be involved and may well be unhappy with the direction of the foundation both because they have less influence and because the foundation has changed.

If the purpose of the foundation is to provide the family with a common philanthropic enterprise, then the family should be well represented on the board and they can work together to direct the foundation’s work.  In this case, the foundation might drift in new directions as the interests of the family change.  Yet, at least the family members will be less likely to complain.[iii]

In the end, there is no simple solution to avoid these types of problems.  Families and their lawyers may experience conflict despite the best planning.  However, we find in our work with families that there are a few reliable ways to avoid much of the potential for disputes:

• Founders should write a clear, unambiguous mission statement.
• The rules for trustee succession should be documented.
• The desired lifespan of the foundation — that is, is it to be time-limited or perpetual? — should be established.

Finally, these important messages should be shared with the appropriate family members early and often.

_____________________________________________________________________

[i] wsj.com/articles/paul-newmans-daughters-sue-newmans-own-foundation-11661284893

[ii] news.bloombergtax.com/tax-insights-and-commentary/newman-daughters-lawsuit-against-foundation-pivots-on-tax-code

[iii] As a caution, we should add that it is also common for one arm of the family to gain control of the family foundation, while another less-represented arm complains about the drift from the founder’s intentions.

Each year as the holiday season approaches, our thoughts turn to charitable giving — and these holiday gifts play a large role in the sustainability of many, if not most, charitable organizations.

This year, our world seems particularly upside down with a war in Europe, Covid (and long-Covid) still lurking, and a possible recession looming. The nonprofit community is already seeing a drop in gifts from individuals. Thus, we encourage you, our clients and friends, to be more intentional with your giving this year.

Here are some practical tips for end-of-year giving.
Don’t give cash. Or maybe, give cash last. Consider your other assets before you give cash. There can be many tax advantages to giving other assets such as stocks, life insurance, your IRA, and even art objects. Talk to your financial advisor.

Don’t wait until the last minute. If you’re giving out of a Donor Advised Fund, or if you’re giving non-cash assets, don’t wait until mid or late December, as these gifts can take some time to process.

Don’t give over the phone. Despite what they might say, you never know who is on the other end. If you’re interested, have them send you something in the mail.

Talk to your family at Thanksgiving. If the family is together around the dinner table at Thanksgiving, charitable giving can be a wonderful topic for engaging all ages and teaching the next generation about the importance of giving back.

Here are a few more issues to ponder.
Don’t be too restrictive.  Grocery prices are rising, and we’ve already seen a drop in small gifts to nonprofits.[1]  Consider a general operating gift to your favorite nonprofits. If they ask you to donate to a specific program, ask them if a less restrictive gift might be more helpful.

Focus. You’ll have more impact and gain greater fulfilment if you focus on a specific issue, problem, or community.

Immediacy. There are several areas that have immediate needs. If you care about reproductive health, climate change, long-Covid, and libraries, organizations that deal with these issues can benefit from your help right now.

Donor Advised Funds. If you don’t know about DAFs, you should. DAFs can be a very powerful tool for charitable giving. Ask your local community foundation or your investment advisor about how a Donor Advised Fund can help make your charitable giving easy and more effective.

No obligatory giving! Resist the urge to give those obligatory gifts to organizations you don’t know or don’t care about. Instead, give to whatever moves your heart or inspires your head. To turn away requests from organizations or issues you don’t really care about, memorize a phrase such as, “I’m sorry, X is not a good fit with my present interests,” or “I am glad to have supported X in the past, but there are other issues or organizations that need my support more this year,” or “That was a one-time gift in support of my friend’s leadership.”

Final thoughts.
Start soon, be focused, and be a little more intentional. Your favorite organizations and causes need you more than ever this year.

Enjoy your holiday season.

[1] https://www.philanthropy.com/article/collapse-in-small-gifts-poses-threat-for-nonprofits-as-recession-looms-report-says