8 minute read
Planning for your family’s financial future is often one of the most important life decisions one can make. This is especially true for high-net-worth families who are seeking to minimize their tax exposure and protect their family’s assets. To help manage a diverse collection of assets for current and future generations, high-net-worth individuals and their families may consider creating a private Family Endowment Fund.
A Family Endowment Fund is a private structure set up to provide members of the fund with grants of money, and, in most cases, to ensure the financial well-being of the family’s future generations. The grants of money from the fund can be used for a variety of purposes. Typically, the fund documents will dictate who can receive funds, when funds can be dispersed, and what purposes funds can be dispersed for.
Family Endowment Funds are particularly attractive to older generations who created wealth and want to encourage younger generations to be involved in social projects. In contrast to Dynasty or GST trusts, which generally make distributions for support and lifestyle maintenance of the beneficiaries, Family Endowments instead focus distributions for the furtherance of beneficiaries’ social projects or activities.
The Family Endowment Fund is often made up of a variety of assets contributed by one or more of the family members. These assets typically grow over time, allowing for the assets within the endowment fund to remain untouched. Instead, the funds the Family Endowment Fund disperses will often come from the earnings over time from the assets. Common assets that are part of a Family Endowment Fund include bonds, equities, real estate, cash accounts that invest in a diversified portfolio, etc.
There is no specific legal structure for a Family Endowment Fund. Rather, the fund can be customized to meet the family’s goals and needs. Depending on the specific needs of the family and the laws of the jurisdiction, this may involve using multiple structures that make up the Family Endowment Fund. This may include making the fund part of a corporation, partnership, or other business structure.
Most typically, the Family Endowment Fund will be structured as a trust. Trusts are infinitely customizable, and the trust agreement can provide key rights and restrictions for members of the trust. Notably, a trust is subject to the laws of the state in which it is formed. Families seeking to set up a Family Endowment Fund in the form of a trust will want to consult with their tax advisor to determine which state offers the best environment for their family’s needs.
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A Family Endowment Fund is most commonly used for family members. While that statement may seem obvious, determining who is a “family member” can be a daunting task if it’s not clearly stated in the fund’s documents. Some family endowment plans have a list of specific individuals who are defined as family members. Others may provide for specific individuals and their direct descendants, excluding spouses and adopted children. Others may elect to provide for all spouses, children, and even some extended family.
When creating the Family Endowment Fund, the family should explicitly provide who is a member of the fund and how membership applies to future spouses and descendants—including those currently alive and who have yet to be born.
A Family Endowment Fund can offer several key benefits. First, the Family Endowment Fund, if it’s in the form of a trust, can help avoid probate upon the death of a family member. Instead of going through the probate process, the assets exist apart from the specific family member because they are owned by the trust or other legal structure that makes up the Family Endowment Fund.
If the endowment is structured as a trust, the trust may aid in avoiding some or all of the federal estate tax if certain requirements are met. However, this type of planning is usually only necessary for families who surpass the estate tax exemption. For the 2022 tax year, the individual estate tax exemption will be $12,060,000, meaning any estate that falls under that value will not have to pay the estate tax. There may also be state estate or inheritance taxes to consider, which vary by state.
Additionally, a Family Endowment Fund allows the family to privately unite the assets of the entire family and then direct those funds towards the family’s goals, wants, and needs. The family can assist members of the fund in large projects, business ventures, education, social or cultural events, and even charitable giving.
A Family Endowment Fund geared toward charitable giving can be structured in the typical structure of other endowment funds. Instead of granting funds privately to the family for their needs, the charitable fund would provide grants of money toward charitable institutions. Just like the private Family Endowment Fund, charitable Family Endowment Funds are usually made up of long-term investment assets that provide the fund with interest and investment income. The income is then used to provide charitable grants to specified organizations. The charitable endowment fund can specify what types of charities or organizations it chooses to donate to.
Typically, charitable Family Endowment Funds are structured either as a nonprofit corporation under 501(c)(3) or as a charitable trust. While a charitable trust is less regulated and generally easier to create, it typically must be irrevocable. Structuring the fund as a nonprofit corporation provides limited personal liability and some additional flexibility with how funds may be used. If the endowment is structured either as a charitable trust or a non-profit, there are usually more compliance requirements, including some public filings.
If properly registered as a nonprofit, the endowment fund may be tax exempt. In addition to being able to collect contributions without paying taxes on them, individuals who contribute funds or assets to the fund may be able to claim their charitable donations as tax deductions.
For high-net-worth individuals and their family, planning ahead is essential to a secure financial future. Proper tax planning, entity structuring, and goal setting can help smooth the process and organize a master plan, for both the current family members and future members.
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