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Planning for Family Foundation Transitions

As families grow and evolve, so too do the needs and goals of family foundations.

Private foundations have been an effective giving vehicle for families to leave a lasting philanthropic legacy for decades. Foundations are impactful means for families looking to create a mark on essential causes, reinforce critical values or drive collaboration across generations.

Like family enterprises, foundations move through distinct life cycles regardless of their intention. While family events, such as deaths, marriages, divorces, retirements and sales of the family business are common causes of transition, foundations also experience geographic dispersion and operational shifts, such as an influx of assets, evolution in mission, structural changes and board/staff leadership transitions.

The longer a foundation exists, the more complex and challenging these transitions become, which may put undue strain on family relationships or board leadership responsibilities. These obstacles may come closer to the forefront as the next generation steps up and families plan for succession. Familiarizing clients with the common transitions they may face and the strategies to follow is essential in navigating these inflection points without sacrificing a philanthropic vision.  

Unexpected Transitions

While many families spend years planning for succession, some losses and tragedies cannot be planned for. In times of grief, younger generations may find themselves stepping into the shoes of a loved one they’ve lost or a leader who cannot continue management.

Even among close families with bylaws that spell out a clear mission, questions ranging from who will lead, for how long and even how to manage regular expenses can abound. Moreover, the growing weight of administration and operational responsibilities, fears of not fulfilling the foundation creator’s legacy and uncertainty of whether to re-direct the foundation to reflect a new generation of philanthropic passions and community needs can overwhelm a family or board of directors.

Having a solidified governance framework is crucial in managing these problematic scenarios. While specific policies will vary depending on the foundation’s size and purpose, facilitating board meetings or retreats to develop a structure that fits their needs can help achieve peace of mind. Governance areas to explore may include the foundation’s mission and vision, grantmaking guidelines, long-term planning and spending policies. Boards may also benefit from documents outlining roles and responsibilities and technology systems to unite members across locations. Revisiting current bylaws to include qualifications for service, such as age, relationship to the founders and prior nonprofit volunteer or board service, can also help.

Influx of Assets

When families experience liquidity events or a younger generation takes the reins, assets passed from older generations create new opportunities to expand or deepen a foundation’s impact. With the responsibilities of managing newfound wealth come natural questions, such as “How do I leverage the increased grant funding most effectively?”

Considering all possibilities is critical in these scenarios. In some cases, older generations may leave behind bequests in multiple forms. These can include concentrated stock positions, equity in a family business, real estate and art. As a result, the next generation may need to spend significant time creating a liquidation and investment plan and updating spending guidelines accordingly. On the other hand, new leaders may be at a crossroads in balancing honoring their parents’ legacy with supporting their interests. For example, children taking over their parents’ foundation, established initially to support educational causes, may feel strongly about broadening support to issues directly impacting their community, such as homelessness or food insecurity.

In these scenarios, families may consult investment specialists to create a plan for unwinding some of the concentrated, illiquid assets and instituting a formal investment policy statement describing what a foundation aims to achieve through its investments. Another critical step is working with advisors to develop a mission statement and formal spending plan for the foundation. This may include outlining strategies to distribute funds and providing directions for balancing supporting legacy grants with new board-directed grants and responsive grants to support urgent needs in the wake of disasters or other emergencies.

Refreshing the Mission and Focus

While foundations are established to carry out a mission for generations, like family dynamics, their goals and structures shift over time. This can become increasingly apparent when the next generation assumes responsibility. They may feel the foundation’s original mission has become ossified or wonder whether the legacy charities it supports are meeting community needs.

Moreover, in the case of many longstanding recipients, a foundation’s board may lose sight of its focus over generations, including what grants are being used for and their impact on the communities served. In these situations, second and third generations might ask, “How do I maintain and honor our founders’ legacy without ‘rubber-stamping’ grants to existing recipients?”

The answer may include a multi-year exercise to narrow the list of recipients, better understand the impact of the grants, or more carefully define the foundation’s priorities, but knowing where to start can be difficult. Advisors can help clients through the process, from guiding a historical grantmaking analysis to arranging meetings with issue-area experts to guide decisions around which existing grants to maintain, which to “tie off,” and new areas to explore. Engaging in these processes re-energizes a board’s foundation and sets the course for long-term sustainability.

Preserving Legacy Across Inflection Points

As families grow and evolve, so do the needs and goals of family foundations. Whether a family has just established a foundation or the third generation is stepping up to the plate, organizational and leadership shifts are natural components of any foundation’s lifecycle. While no two transitions are alike, good governance processes and operational frameworks can help families endure these changes and emerge with a clearer mission and understanding of how to make a positive impact.

As more families revisit their wealth transfer plans, now is an important time to help clients understand the scenarios their family foundation might face and the steps they can take now to ensure future transitions don’t stand in the way of meeting philanthropic goals. 

Caroline Hodkinson is Head of Philanthropic Advisory at Bessemer Trust.

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