A family private foundation creates a structure for charitable giving and a lasting legacy for the family, but it also comes with administrative burdens. Stephanie Yan, GHJ Managing Director and Private Foundation Practice Leader, talks to Pegine Grayson, Senior Vice President/Client Advisor, Director of Philanthropic Services at Whittier Trust, about the mundane but essential tasks needed to run a private foundation.
Whittier Trust is the oldest and largest multi-family office headquartered in the west. With offices in Nevada, Washington and throughout California, and high-net-worth clients in 36 states, Whittier Trust is dedicated to making a meaningful and lasting difference in all aspects of their clients’ wealth, family and legacy.
WORKING BEHIND THE SCENES
Stephanie Yan: Most people who founded their own private foundations are passionate about giving, and they find it rewarding to support public charities that carry out missions that speak to them. But aside from grant-making, there are a lot of not-so-rewarding but necessary aspects in running a private foundation. Can you speak about these functions that you carry out on behalf of your private foundation clients?
Pegine Grayson: Absolutely. My clients by and large are involved, passionate about philanthropy and smart. But I never have a client come to me saying that they are jazzed about preparing documents for the annual audit and tax return preparation, ensuring everything gets filed on time, coming up with the annual operating and giving budget, putting together material for board meetings, keeping the minutes or becoming experts on self-dealing rules. We, as professional administrators, step in and take those burdens off our clients, so that they can focus on philanthropy, the part that feeds their soul.
SY: Speaking for my fellow auditors and my colleagues in tax, we certainly appreciate well-prepared documents and financial information coming from professional administrators such as Whittier Trust instead of hand-written checkbooks or a shoe box of receipts. It also keeps foundation costs down when the accounting records are well organized. Can you tell me a bit more about budgeting?
PG: Some foundation boards would like to have annual operating budgets and monitor the actual expenditures against the budget as the year goes on. This may not apply to foundations where family members are closely involved, but — at minimum — all foundations need to budget out the grant-making for the year in order to meet their minimum payout requirements.
SY: Yes, that is critical. Any undistributed income is reported on the informational tax return, and the penalty on falling short of that is quite steep — 30 percent. You mentioned preparing for board meetings and keeping minutes. What are the requirements on that end?
PG: If a foundation is established through a trust instrument, there really are no requirements. But if it is a corporation, it must have articles of incorporation, bylaws and a board, which can be as small as one person. They must have an annual meeting and minutes must be kept for that meeting.
SY: Board meeting and committee meeting minutes are also something we look for in an audit. Beyond meeting regulatory requirements, minutes also serve as a central place to document all major decisions, such as grant-making and investments, where the board exercises its oversight in the operation of the foundations. Even for foundations that are set up as a trust, having regular board meetings and keeping minutes are important. You also mentioned self-dealing. Those rules can be tricky, right?
PG: Self-dealing rules are tricky and counterintuitive at times, and the penalties are so draconian. Because we often see foundations and board members unwittingly getting themselves in trouble, we educate board members on the rules, steer them clear of the common pitfalls and, if necessary, come in and help them correct the mishaps. The common ones I have seen are tickets and tables for galas, the fulfillment of personal pledges with foundation resources and unintentional misuse of foundation credit cards. It is very easy to fall into the traps. We serve as second pair of eyes to help keep our clients inside the guardrails.
GOVERNANCE BEST PRACTICES
SY: Are there any best practices in governance that you would recommend for family foundations, such as policies to put in place?
PG: There are not really any requirements for governance policies, but it is best practice to have a conflict-of-interest policy, a travel and expense reimbursement policy, etc. Conflict of interest is very different from self-dealing. Self-dealing is a big no-no, whereas conflicts of interest are virtually inevitable and are OK as long as they are handled properly. An individual with a conflict of interest needs to disclose it so that the board can figure out the best way to work around it and make sure decisions are made by a majority of disinterested directors.
To learn more about private foundation administration, reach out to GHJ’s Private Foundation Team.