Ultra-High Net Worth Guide: How to Start A Foundation
9 Tips to Fulfill your Ultra-High Net Worth Retirement Goal of a Family Legacy and Impact
As an ultra-high net worth family, you can devote your time and resources to many different retirement goals. If one of those goals involves charitable giving, one of the best strategies for effectively disbursing your wealth over many years is to start a foundation. For much more information about estate, excise tax, and wealth management planning for those of you with over $10 million in liquid investable assets, we recommend you request your free copy of our book by clicking here.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
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With the tens or hundreds of millions of dollars you’ve earned, a foundation allows you to use it in ways that best represent your values and beliefs.
As an ultra-high net worth household, starting your own foundation may be preferable to partnering with existing nonprofit organizations. It’s also preferable to starting your own nonprofit because a foundation has more flexibility in the number of cases it can support, and you don’t have to raise money.
Some foundations raise money, but fundraising invites its own set of challenges, such as personnel and infrastructure. As an ultra-high net worth philanthropist, you don’t need to hassle with all those challenges if you’d prefer not to because you can fund the foundation yourself.
By starting your own foundation – even if it happens after your death – your estate retains control of governance, assets, and spending. You decide which causes you want to fund and to what degree. Thus, a foundation enables you to use your wealth to support causes that align with your values. And they’re flexible.
If you want to set up a charitable foundation, here’s a good place to start.
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Example of a Thriving Charitable Foundation
Before starting your own family foundation, you would be wise to study a few existing ones that are thriving and successful.
One example is the MJ Murdock Charitable Trust, which supports causes such as education, spiritual growth, arts and science research in the Pacific Northwest states.
The Murdock Trust was founded in 1975 by the estate of Jack Murdock, who started a company called Tektronix back in 1946. The Trust began with $91 million and has given out over $975 million in funding to various nonprofits. Today, the Trust is worth $1.2 billion.
The Murdock Trust serves as a great example of smartly setting up your foundation as an ultra-high net worth individual. Following are 9 tips for starting a foundation, based in part on their model.
How Do I Start My Own Foundation?
1. Direct Your Estate Plan to Start the Foundation Source
By far, this is the most critical step you must take. You may have a retirement goal of starting a foundation, but what happens to your goal if you die prematurely?
This is, in fact, what happened to Jack Murdock, who died in 1971. His foundation began in 1975. How could this happen? Because he specifically directed that three appointed trustees must start a charitable trust “to nurture and enrich the educational, cultural, social and spiritual lives of individuals, family members, and community.”
Not only did his estate plan require a foundation to be set up in his name, but he gave it a clear mission. This ensured that even more than 40 years later, his foundation is still giving money to nonprofit causes that align with his values.
Murdock’s legacy will live longer than he did and probably longer than all of us will.
The Murdock Trust began with $91 million, funded by his estate. As an ultra-high net worth person, he knew a foundation was the best way to ensure his wealth got used for purposes he would support. By putting this in his estate plan, he ensured his retirement goal of starting a private foundation would come to pass.
2. Choose a State and a Name
Foundations must be incorporated, and each state has different legal requirements related to starting and running a charitable foundation. You’ll want to spend some time investigating which state would be the ideal home for your foundation.
You also need to give your foundation a name. The primary obstacle here is that the name you want might already be taken. You need to make sure your preferred name for your foundation is available and secure the rights to it as soon as possible.
3. Work Through All the Legalities
You’ll have to create by-laws, conflict of interest policies, and several articles of incorporation. You personally don’t need to do all this. You can appoint or hire experts in this arena to do it for you.
4. Clarify the Mission and Values of Your Foundation
You must be clear about what you want your foundation to do. Don’t leave this up to interpretation by lawyers and long-lost relatives. Know what you want to accomplish, and flesh out the details so whoever runs your foundation, even 50 or 100 years from now, will run it in a way that would please you.
5. Appoint Managers of the Assets
As you saw earlier, foundation assets span a wide variety. Not all of them require professional management. But the majority of your assets will likely require an investment management team if you want to steward them for healthy long-term viability.
As you saw, the Murdock Trust began with $91 million, has given out $975 million, and is now worth $1.2 billion. They’re doing something right. They’ve already given away ten times Murdock’s initial funding of the Trust, and the foundation is worth even more than what they’ve given.
With smart investment planning, the Murdock Trust has avoided the need for fundraising. They’re growing their assets on their own, at a rate that exceeds their giving. In theory, they can go on forever.
You have three basic options for how to manage your foundation’s assets:
• Manage assets internally
• Manage assets externally
• Manage assets using some combination of both
The Murdock Trust has a lifetime-appointed 3-member board that directs how their assets should be invested. But it farms out the task of managing these assets to outside firms – over 20 of them. So they leave the nuts and bolts of investment management to external companies.
You might prefer to do this internally. In that case, you’d need to hire investment management personnel from within your foundation. Your oversight of this process would look different depending on how you set this up.
6. Develop Selection Criteria for Asset Managers
This part is critical to get right. Some foundations get started with as little as $250,000. Typically, to stay afloat, they would have to devote time and resources to ongoing fundraising.
But as an ultra-high net worth foundation, you’ll be in a position like the Murdock Trust, starting with tens or hundreds of millions of dollars in existing assets. That means whoever you hire to manage these assets should use methods that align with your foundation’s goals and values.
You’re putting your foundation’s existence in their hands. This is not a job to hand off to your cousin (unless your cousin happens to be a professional wealth manager with decades of experience). Murdock developed a whole list of criteria for selecting foundation asset managers.
They also require any investment management firms they work with to have an established institutional client base, among other things. Nothing too surprising with these selection requirements. But the point is – they have them. They worked out the details of this crucial part of their foundation to ensure their assets are professionally managed.
According to Foundation Source, 66% of the 91,000 private foundations in the U.S. have under $1 million in assets. Thus, a majority of foundations faces a higher risk of failing than you should be willing to tolerate. Yes, you’ll have more money to start with. But if you want to give at the scale of the Murdock Trust and continue doing so for generations, you need to put great care into developing an enduring process for selecting your investment managers.
7. Establish Clear Performance Guidelines
Once they are hired, The Murdock Trust requires its investment managers to follow its performance guidelines.
Again, as a foundation, you control your governance, assets, and spending. So, use it! Don’t let your investment managers hide from you. Require them to manage your assets according to your values and long-term goals.
Put in writing how often you will evaluate their performance.
Be clear about any forms of investment activities, such as venture capital or real estate, and you may not want the foundation taking part in, no matter what the reason.
And most importantly, work out a defined asset allocation that aligns with your foundation’s long-term objectives. The Murdock Trust, for instance, has a stated goal to exist perpetually. They don’t want to ever run out of money. Thus, their asset allocation is designed around long-term growth and stability. See more about Murdock’s investment objectives.
8. Hire and Appoint Your Team
With your foundation legally established and named, and with your investment manager selection criteria and performance guidelines created, you’re ready to launch.
Hire the appropriate people to run the foundation, accept grant requests, evaluate your investment performance, and all the other tasks necessary to keeping your foundation center healthy and generous.
Probably your biggest administrative task will be accepting and processing grant requests. You will need to develop a system for this and hire people to manage it.
9. Fund It and Start Giving
Again, as an ultra-high net worth foundation, you’re not looking to fundraise. You’re giving a large share of your own wealth to this so you can achieve your retirement goal of producing a legacy that lasts far beyond your lifetime. And you want that impact to start immediately. Not twenty years from now.
Whatever you want to see improved globally, you can direct your foundation to pursue those goals. That could be political, educational, social, environmental, religious, artistic, scientific, technological, economic, global, agricultural – or many of these all at once.
You may decide to divide your family foundations into separate branches to focus on specific missions. As long as you’re there to supervise it, you’ll derive great joy in seeing your wealth used to fund the causes and values that you care most about.
How to Start a Nonprofit Organization With No Money
Although starting a nonprofit or charity organization has many financial costs, you shouldn’t have to go broke working to improve the world. This is how a lot of new charities get their start. When it comes to figuring out how to start a 501(c)(3) organization, the following is a valuable guide that will help you get started.
1. Establish your core values
Specifying your core principles is always at the forefront of your to-do list while exploring how to start a nonprofit organization. Your nonprofit organization’s core principles will serve as the basis for all of its decisions, from marketing to participation in market value. So make sure you pick them carefully and that they support your organization’s goals. If you’ve decided to start a nonprofit out of your passion, you probably already have a general understanding of what your organization should work for.
2. Costs should be researched, and a budget should be prepared
The next step to starting a nonprofit is to plan for the necessary expenses. Since nonprofit registry costs vary greatly from state to state, you’ll need to do some research to determine the cost in your case. There are numerous resources that describe how to start a foundation and the associated costs. Here are a few things to consider.
– Study the IRS page on forming a nonprofit foundation.
– Find out about the documents, expenses, and time required to obtain nonprofit status.
– Find out how much it costs to start a nonprofit in your state.
3. Start raising funds for your operational expenses
The costs involved in obtaining 501(c)(3) status are among the primary reasons a nonprofit organization can delay obtaining it. Fortunately, crowdfunding is one of the quickest ways to raise funds for a nonprofit startup. You can call out to your network of individuals, relatives, and supporters to gather support for funding through an online fundraiser.
4. Develop your own nonprofit foundation
When learning how to start a nonprofit, you’ll often come across the requirements for operating a foundation. Although it’s completely optional, it’s something you need to think about for added legal security. Being a non-profit corporation can help you get bigger grants, apply for tax-exempt status more easily, and benefit from tax deductions. You’ll need to acquire board members, create a board of directors, write bylaws, prepare the necessary documents, and pay the fee.
5. File a request for tax-exempt status
The last step in forming a nonprofit is to submit Form 1023 to the Internal Revenue Service. This form basically asks the federal government to consider your non-profit as a tax-exempt organization. The process of filling out this form can be time-consuming. It necessitates a thorough understanding of your assets and liabilities and your income and expenditures, which is why it’s always beneficial to enlist the expertise of a professional, such as Hurwit & Associates.
Securing Your Retirement Goals Begins Now
You may have a dream of starting a charitable foundation, but that doesn’t mean it will happen.
Even as an ultra-high net worth household, your retirement goals, and plans can be derailed by unforeseen events. Tax realities might change—surprise medical expenses. Securing your retirement dreams requires taking action today.
If you want to ensure your future retirement goals, such as starting a charitable foundation, become a reality, schedule a Wealth Management Analysis meeting today with Pillar.
We have developed a process that builds an optimized investment plan around the achievement of your goals. You will know you’re on track to achieve your goals with near absolute certainty. And you will know it continually, every quarter. See how our system assures you of the retirement of your dreams. We recommend that you contact us to Schedule a Wealth Management Analysis meeting.
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