By Albert B. Crenshaw
Special to The Washington Post
Sunday, November 18, 2007
In the late 1980s, Constance Lane and her brother, Landon, faced a difficult decision. The furniture business founded by their grandfather had been sold. The deal had given them stock in the new owner, but an attempted hostile takeover of that company had driven up the value of their holdings, at least temporarily, and it seemed the time had come for them to "sell, pay a fortune in tax to Uncle Sam, and get out."
The Lanes agreed to do that, but as part of the process they decided to place some of their stock in a private foundation and sell those shares via the foundation. The move produced some tax savings, but also, Constance Lane said recently, it created a long-running charity that has become one of the most rewarding experiences of her life.
"There are benefits . . . you can't put a value on," she said, reflecting on her nearly 20 years of helping worthy causes in and around her home of Rapid City, S.D.
And the work has drawn in her 36-year-old daughter, Amanda Stanfield, who says she sees her mother as a role model and hopes to carry on the work of the foundation.
The term "private foundation" has long had an aura of great wealth about it, conjuring up, on the one hand, images of Bill Gates, Warren Buffett and other mega-millionaires setting out to solve the problems of the world, and on the other hand of tax finagling that ordinary people cannot get away with.
But private foundations can be relatively small -- the Lanes' L.B. Lane Family Foundation initially had assets of just over $700,000 -- and experts say $500,000 can be enough to establish one capable of continuing indefinitely if reasonably well managed.
Today, the Lanes' foundation's assets total about $1.6 million, and it is able to give away about 6 percent of that every year.
Many foundations become deeply involved in their communities, providing seed money for a variety of programs, and the work often draws in the next generation of the founding family, both teaching them money-management skills and passing on to them the values and goals of the parents and grandparents.
"The reward comes not just from the tax advantages but from the sense that my children are able to continue this -- it's a family-unifying event," said John Dedon, an attorney with Odin, Feldman & Pittleman in Fairfax.
Perhaps surprisingly, private foundations are not hard to set up, and once established, they can be and often are run by the founder and his or her family. In the Washington area alone, there are nearly 1,000 private foundations with assets of $1 million or less, and of these, roughly two-thirds have assets of $250,000 or less, according to a study by the Foundation Center, a New York group that studies and gathers data on philanthropy.
But what, exactly, is a private foundation?
Oddly, that's not as easy to answer as it might seem, because technically a private foundation is defined by what it is not. As the Internal Revenue Service puts it, "Every exempt charitable organization is classified as either a public charity or a private foundation." Public charities are such institutions as churches, hospitals, colleges and the like, and they actively raise money from a variety of sources.
"Private foundations, in contrast, typically have a single major source of funding (usually 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, rather than the direct operation of charitable programs," according to the IRS.
It takes a few simple steps to establish a foundation, said Tim Walter, executive director of the Association of Small Foundations in Washington.
A foundation must have governing documents such as articles of incorporation and bylaws. It must also register with the state and file with the IRS to obtain a tax exemption.
Walter said "the rule of thumb" is that attorneys usually charge "$2,000 to $5,000 to set one of these up for you."
"It is possible to do it by yourself, paying simple filing fees. It's not a lot of money and doesn't take a lot of process," he said. But he cautioned that if you hire someone, you should make sure they are familiar with private foundations. This is particularly true when it comes to filing the foundation's tax return. The return isn't hard, but it's different from other returns, and there can be serious penalties for getting things wrong.
But if private foundations are so wonderful, why doesn't everybody do them?
For "individuals intending to endow [a foundation] with a substantial amount of money and deal with it over an extended period of time," a private foundation can be appropriate, said David M. Bradt Jr., managing director of the McLean office of WTAS, a wealth and tax advisory service.
But for those with lesser amounts in mind and shorter time horizons, Bradt suggested that contributing to a "donor-advised" fund or a community foundation can provide many of the same benefits as a private foundation but with less hassle and expense.
Community foundations are grant-making charities that are in effect associations of other grant-making organizations. And unlike private foundations, they meet the requirements of a public charity and thus are subject to more-generous limits on tax deduction. Tax deductions for donations to charity are generally limited to a percentage of your income, and the percentage for most private foundations is lower (30 percent of income) than it is for public charities (50 percent).
Donor-advised funds are charities, including some mutual funds run by big financial firms such as Fidelity Investments, that can receive donations, invest them, and then distribute them to charities of the donor's choosing.
Bradt noted that community foundations can include donor-advised funds and that with a donor-advised fund, family members can talk through their charitable goals, much as they would with a foundation, except that they need only make a recommendation to the fund to carry out their plan.
Or for real simplicity, you can make donations directly to a charity -- something that is as easy as writing a check and taking a deduction.
On the other hand, proponents of private foundations note, with direct donations or donor-advised funds, you have little or no legal control over what happens to your money later.
With donor-advised funds, you can only make a recommendation; you cannot enforce it, though it is rare for one of these funds to refuse to carry out the donor's wishes.
And direct gifts, even if there are strings attached, can be tough to control. Currently, the Robertson family, heirs to the A&P supermarket fortune, are engaged in litigation with Princeton University over what the Robertsons claim is the university's failure to use a 1961 gift of $35 million for its intended purpose. That gift is now worth about $900 million.
For those with a charitable bent and a desire to retain control of their wealth, private foundations offer flexibility. They can be combined with such vehicles as charitable trusts so that they can begin operating during the donor's life and then become fully funded at his or her death. For example, a donor can set up a charitable remainder trust that gives him a current tax deduction and an income stream for his life or a period of years at the end of which the remainder of the trust goes to his foundation.
Foundations can be flexible in other ways as well.
Constance Lane and her brother, for example, operate their foundation in two pieces: Constance's in South Dakota and Landon's in North Carolina.
In Rapid City, Constance Lane's fund has given money to a program that provides backpacks for poor children (mostly Native Americans) to help them carry home food from their school lunch. Teachers noticed that the children performed fairly well during most of the week but did much worse on Mondays. Realizing that they were doing poorly because they weren't getting enough to eat at home over the weekend, the teachers appealed to the Lane foundation for help. Now the program has expanded throughout the Rapid City school system, Constance Lane said.
The foundation has also helped start or expand other programs including suicide prevention as well as assistance for the residents of Libby, Mont., a town affected by asbestos from mining operations there.
Libby residents are "on their knees really fighting to keep what they loved there," said Stanfield. "It's very daunting that what they need is far more than what we can provide. . . . Mom came up with [the idea of] training them to learn to request grants on a much larger scale."
"There are lots of opportunities to make a difference out here" in South Dakota, Constance Lane said. "It's extremely satisfying."