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How to Create a Private Foundation

Starting an organization to pursue your philanthropic passions can add a new level of meaning to your life—as long as you know how to avoid the pitfalls.

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On September 11, 2001, Nashville-based healthcare entrepreneur Donato Tramuto was supposed to be aboard United Airlines flight 175 from Boston to Los Angeles with two friends and their son. Tramuto and his partner, Jeff Porter, had recently hosted their West Coast friends at their home on the Maine seacoast, and Tramuto had planned to fly back with them to LA, where he commuted regularly to the offices of Protocare, a drug development services company he had cofounded in 1998. Circumstances, however, led him to fly out a day earlier. His friends kept to their schedule. “I was on a treadmill in California watching television just after 6 a.m. Pacific Time when two planes slammed into the World Trade Center,” he recalls in his 2015 book, Bulldozer Moments. “Had I not changed my travel plans, I would have died that day, too.” By year’s end, he had created the Tramuto Foundation in their memory. “We had always contemplated doing a private foundation, but I think the loss of my friends triggered it,” Tramuto told me.

Today, in addition to his role as CEO of wellbeing solutions provider Tivity Health, Tramuto oversees his foundation’s human rights, education and healthcare-focused activities—it has distributed more than $7 million in contributions since its launch—as well as leading a second nonprofit he created in 2011 to support global healthcare initiatives, Health eVillages. “I have always been conscious of the legacy we want to leave behind,” he says. “There’s nothing more satisfying than seeing somebody who has been helped.”

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For many individuals and families, private foundations offer the opportunity for high-impact philanthropy that goes beyond simply making charitable gifts. Yet many people don’t know how to start a foundation, let alone navigate its complexities. “The problem someone might have if they’re new to philanthropy is not knowing a lot about the process—how to fund, what vehicles to use, how to find organizations,” says Page Snow, chief philanthropic and marketing officer at Fairfield, Conn.–based Foundation Source, a provider of support services for private foundations.

If you’re interested in launching a foundation, here’s what you should know.

Understand your expectations

From private foundations to public charities and donor-advised funds, there is no shortage of philanthropy vehicles for high net worth families and individuals. The first thing is to understand what a private foundation is and how the creation of one might (or might not) advance your goals.

Private foundations are tax-exempt 501(c)(3) organizations that typically derive their funding from one source, such as a family, an individual or a corporation, to fund causes that support their missions. They do not need to engage in fundraising or have a diverse board of directors. In these ways, private foundations are different than other 501(c)(3) entities like public charities, which seek funds from the general public—usually to operate a specific activity—and have other IRS requirements, such as proof of substantial public funding and a board representative of the community. These differences provide foundations more control over their mission and the flexibility to react quickly to its needs.

For Tramuto, this hands-on control was crucial to his choice to create a foundation rather than a donor-advised fund, which acts more as a savings account within a public charity or financial institution for donors to use toward charitable gifts. “I don’t like just writing checks out,” he says. “I like to see results and have some interaction with the organizations we’re helping.”

This depth of engagement also benefits families who might want to instill philanthropic values in its younger members. “Foundations are a great training ground to teach the next generation all sorts of life and business skills,” says Snow. “Watching kids manage the foundation’s investments gives parents a clue of how the children are going to manage their affairs when they’re not around.” As a side benefit, she adds, geographically dispersed families can use annual board meetings as a way to touch base. “It’s a non-Thanksgiving reason for the family to get together.”

Get help in the early stages

Despite these benefits, a foundation might present a bigger commitment for some people than they really want. One alternative: Powerhouse philanthropist Adrienne Arsht oversees the donor-advised Arsht-Cannon Fund, a $17 million fund established within the Delaware Community Foundation upon her parents’ death. “I’m glad my parents set it up that way because running a private foundation runs into so many legal issues—it’s easier to put it under a community foundation,” she admits. “We suggest to the DCF how the money should be spent, but effectively, as long as I’m alive, it’s my vision and my passion.”

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The administrative and operational needs of private foundations can be daunting to philanthropists and their wealth advisors, who understandably steer less-experienced clients toward donor-advised funds. “Logistically, that can be easier—it’s less administratively burdensome. Running a foundation can be like running a business,” says Betsy Erickson, senior director at Arabella Advisors, a D.C.–based philanthropy consultancy.  “What you want is the right support, so the philanthropy feels enjoyable.” Many companies such as Arabella Advisors or Foundation Source offer an array of services that can include back-office support, strategic guidance, record-keeping and compliance, easing the administrative burden on the founders.

Some of the issues Donato Tramuto needed to learn about early on included IRS rulings, the percentage of personal income that he could donate and record keeping. “We did retain a consultant who helped us to really understand,” says Tramuto.  “We were tiny in 2001. That’s not the case today.”

Retaining the services of a philanthropy consultant, in addition to other professionals such as accountants and attorneys specializing in the nonprofit space, can spare you headaches down the line. “It’s important for families to get expert advice and not just think that it will just work out by bumbling through it,” says Erickson, who cites complex IRS requirements as a common pitfall for beginners. “That can really have tremendous costs in terms of impact and family engagement—the penalties for self-dealing from the IRS are quite significant.”

Define your long-term strategy

How long will your foundation exist? Will its mission have a limited lifespan? And what will your or your family’s situation be in 20 or 30 years? These are some of the questions you should answer while considering the purpose of your foundation.

“Many philanthropists think about foundations in the short term to fulfill a tax need or check off a box in terms of estate planning,” Erickson says. “They often don’t go down the road far enough in thinking. What if the foundation you think is going to be $10 million by the time you die turns out to be $200 million?”

The initial endowment for your private foundation will depend on your strategy. Traditionally, financial advisors have recommended that, in order to justify its expenses, a foundation be funded with at least $1 million to $5 million—in addition to staff and other operational costs, private foundations are also subject to a 1 to 2 percent excise tax and are required to distribute at least 5 percent of their net assets each year. But according to Foundation Source’s Page Snow, many foundations can start with as little as $250,000. “The reality is that 87 percent of all foundations are under $5 million—67 percent are under $1 million,” she says. Founders may want to test the waters with a smaller sum, or they could invest a smaller amount in anticipation of a liquidity event that will lead to a larger endowment. “I have seen a number of foundations that started for under $1 million that are now at over $100 million,” Snow says.

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Another question is the lifespan of the foundation. “A lot of future decisions stem from that,” says Snow. While many foundations are set up in perpetuity, that plan may not suit your personal goals. “If the founders are concerned because they have a very focused agenda and they want to make sure the next generation or anybody else doesn’t go in a different direction, they may decide to sunset the foundation.”

It’s precisely that concern which has informed Donato Tramuto’s long-term vision for his foundation. “I’m not going to be around forever. And even if I were, you grow old. You don’t have as much energy,” says Tramuto, who is 63 and does not have children. “We could keep the foundation forever and have it self-funded through the wealth transfer, but that bothers me. You take risks when you try to have your foundation exist forever without knowing who’s running it.” As they plan for the future, Tramuto and his partner are exploring the possibility of rolling the foundation into a university that shares their values and passion for improvement in healthcare.

Don’t be afraid to experiment–but stay focused

With proper guidance, the structure of a foundation can let individuals and families explore a variety of ideas as they discover causes to champion. A broad mission statement, for example, can give founders latitude to make grants to diverse organizations. “I don’t think they can go wrong,” says Snow. “In fact we encourage them to experiment and give to lot of organizations.” The IRS also allows private foundations to make grants directly to those affected by natural disasters. Additionally, a foundation can also be set up so that members receive a small percentage of discretionary funding to make donations as individuals. “That helps to keep everybody in the family engaged and make sure everyone is funding the types of things they want.”

Yet testing the waters should always serve a purpose, says Betsy Erickson of Arabella Advisors. “You can iterate and make mistakes and try things out, but at what cost?” she says. “Making mistakes is part of learning and growing—everybody is going to do that—but making too many mistakes wastes a lot of resources and really burns out an individual or a family. It can really diminish the impact you’re trying to have.”

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The focus you develop for your foundation, says Tramuto, will determine the impact you have. When he started the Tramuto Foundation in 2001, he worried about the organization’s relevance. “It was small. We didn’t have the accumulation of funds and wealth that we have today,” he says. “Some people looked it and kind of laughed it off, but we stayed focused on what we believed in. Ultimately, relevance is not determined by how much you contribute, but by how much passion you put behind the vision.” 

Getting Started

Interested in starting a private foundation? These six resources will help you learn more.

Adler & Colvin, a renowned San Francisco-based law firm focused on the nonprofit and philanthropy sector, 415.421.7555, adlercolvin.com

Arabella Advisors, a philanthropic consulting company based in Washington, D.C., Betsy Erickson, senior director, betsy@arabellaadvisors.com, arabellaadvisors.com

Exponent Philanthropy, the largest association of funders in the U.S. and the only one dedicated to serving small foundations with little or no staff, Henry L. Berman, CEO, henry@exponentphilanthropy.org, 202.580.6560, exponentphilanthropy.org

Foundation Source, a provider of support services for private foundations, Page Snow, chief philanthropic and marketing officer, psnow@foundationsource.com, 203.319.3710, foundationsource.com

National Center for Family Philanthropy, a nonprofit membership association that provides support to family philanthropies, ncfp@ncfp.org, 202.293.3424, ncfp.org

National Council on Foundations, a nonprofit industry and advocacy group, Kathleen Enright, president and CEO, kathleen.enright@cof.org, 202.991.2423, cof.org

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