More and more family owned businesses, from the largest to the smallest, are engaging in philanthropy. Many family businesses use philanthropy as a way to develop and commit to fundamental family values for current and future generations; publicly express the values of the family business, support the community, and benefit from the attendant reputational goodwill; provide an opportunity for family members not active in the family business to further the family business values in a meaningful way and to teach younger generations about philanthropy and the family business’s culture and philosophies; and, provides an opportunity to involve valued employees of the business, family and non-family, in activities to strengthen their bonds and commitment to the family business, and afford them an opportunity to support the family business’s values, add value to the community, and build and maintain camaraderie and morale.
There are many options for a family business to carry out its philanthropic activities and goals, including:
- Use of a family private foundation;
- Use of a disregarded or flow-through entity for tax purposes, like an LLC;
- Use of a donor advised fund; and,
- Direct contributions and volunteerism.
Many family businesses opt to use more than one of these avenues to carry out their philanthropy. Which options and when they are used depend on what the family business is trying to achieve.
For example, a family owned business which manufactures medical devices or composite parts may wish to support research in related areas by universities or other charitable organizations, and/or to provide scholarships for study in such areas (though care needs to be taken that the benefit to the family business is not more than incidental). Or, a family business which develops real estate may wish to make grants to support low income housing or other homelessness relief efforts. Or, a family business which owns restaurants or manufactures food or beverages may wish to support local food banks or other organizations which provide hunger relief or educational and job training and retraining. Or, a family business which sells and installs flooring may wish to engage in a volunteer day to help build housing for low income community members.
Contributions to a family private foundation are eligible for an immediate charitable contribution deduction and may be controlled, subject to state nonprofit corporation and/or charitable trust laws and federal tax laws, by family members. Most family private foundations make grants to other charitable organizations. However, in addition to traditional grant-making, a family private foundation may also make program-related investments (PRIs) or mission-related investments (MRIs) in furtherance of its charitable purposes and/or mission. For example, if a family owns a maritime tug boat and towing business, its family foundation may make loans to a for profit entity that researches, develops and/or manufactures energy efficient and environmentally friendlier engines if the family foundation’s charitable purposes and/or mission include the support of such environmental matters. Upon repayment of the loan, the family foundation will have an increased amount of funds from which to make grants that support its charitable purposes. There are important different tax consequences to the family foundation of program related investments and mission related investments, which are beyond the scope of this post; it is strongly recommended that a family foundation have competent tax exempt organizations legal counsel, with experience in PRIs and MRIs.
Family business owners who are not in need of an immediate charitable contribution deduction or wish to fund philanthropy with large gifts of appreciated stock or other business interests for which a charitable contribution deduction may be limited, may wish to consider using a limited liability company (LLC) created for charitable purposes which flows through to the LLC owners all income tax items, including charitable contributions deductions, such as when the LLC makes gifts of appreciated stock or other business interests to charitable organizations of the LLC owners’ choosing. Use of an LLC also, among other things, avoids the need for public annual tax reporting, eliminates the requirement of a private foundation to make minimum charitable distributions each year, allows the family members to maintain complete control over the assets transferred to the LLC (while they are held by the LLC), avoids the restrictions imposed on private foundations (for example, there is no limit on the percentage of family business ownership interests owned by the LLC; the family business and its owners may enter into lease agreements and other contracts with the LLC; and political and lobbying expenditures may be made from the LLC), and affords the ability to pay family members compensation for services rendered to the LLC without the need for compensation committees, surveys and the like to establish reasonableness.
The family business may wish to establish a donor advised fund at a local community foundation or a commercial financial institution, to which the family and family business may make contributions and from which family members and/or family business executives may recommend distributions to other charitable organizations, such as for research that benefits the industry in which the family business operates (but results in no more than an incidental benefit to the family business). There are presently no minimum distributions requirements from donor advised funds, but most creators of these funds actively recommend distributions annually in order to carry out the desired philanthropy.
If scholarships are part of the family business philanthropy, funds may be given directly from the family business or from the family foundation to the educational institution. While scholarships may not be designated for any particular person, they may be made to support study in an area of interest to the family business.
A family business that engages in philanthropy should take care to ensure the activities are in compliance with the numerous state and federal laws, including those relating to nonprofit corporations, charitable trusts, charitable solicitations, and tax exempt matters such as private inurement, private benefit, excess benefit transactions and application of private foundation excise tax rules, including one which regulates the amount of family business stock or other business entity interests which may be permissibly owned by a private foundation. Experienced tax exempt organizations legal counsel is strongly recommended.
Dana Reid is a trusts and estates and tax exempt organizations attorney with 20 years’ experience advising clients on all aspects of estate planning, including business succession and intergenerational planning, and gift, estate, and generation-skipping transfer tax matters. Her work also includes charitable planning, with a focus on creating and supporting private foundations, nonprofit public charitable organizations, and charitable remainder and lead trusts. Dana can be reached at [email protected] or directly at 206-757-8116.