Family Foundation Succession Planning: The Advisor's Role

Meg Lassar Strategic Philanthropy Analyst 29 September 2010

Family Foundation Succession Planning: The Advisor's Role

The $41 trillion intergenerational transfer of wealth is upon us. Despite the recession, current household wealth far exceeds the base level that was originally used to calculate the size of the wealth transfer in 1999, and economists believe that it will continue at the predicted level.

The $41 trillion intergenerational transfer of wealth is upon us. Despite the recession, current household wealth far exceeds the base level that was originally used to calculate the size of the wealth transfer in 1999, and economists believe that it will continue at the predicted level. If we assume that 6-8 per cent of this wealth transfer is devoted to philanthropy (the percentage of estates that typically goes to charity), then we can expect charitable giving to increase by more than 25 per cent over the next 40 years. This presents a ripe business opportunity for you to engage in philanthropic planning with your aging Baby Boomer clients—53 per cent of whom, according to a 2008 Bank of America survey, involve their young and adult-age children in charitable giving decisions.

Not only does the wealth transfer make now an appealing time to work with families around philanthropy, but also the economic recession and subsequent foundation endowment losses (averaging 17.2 per cent among independent foundations in the US) have made it all the more challenging for the next generation of family foundation leadership to maintain their family’s charitable giving programs. Baby Boomers, despite seeing their retirement accounts take a hit, have spent the past 30 years accumulating wealth and are now at the stage of life when they are more focused on spending and giving away their assets. At the same time, their Gen Y children—a cohort that volunteers in record numbers—are looking for ways to put their wealth to work for the social good. If these families have foundations, they are likely grappling with the issue of how to prepare for leadership transitions.

While succession is an issue you may have dealt with in the context of family businesses—only 10 per cent of which are still owned by family after the second generation—it is less likely you have worked with clients to transition foundation leadership, despite the fact that family foundations tend to live much longer, well into the third, fourth and even fifth generations. But as a trusted advisor, you can serve as an indispensable resource for founding generations trying to foster proper stewardship of their family foundations among their children.

The strengths and values of a family foundation are best passed down while the senior members are still living. This allows for a family’s values to be more easily transmitted from one generation to the next as children and grandchildren learn directly from their parents and grandparents. Therefore, it is best to begin planning for succession before a crisis forces the discussion.

Beginning the Process

One way to initiate the conversation is to encourage the foundation’s current leadership to write letters to members of the younger generations explaining the motivations behind their philanthropy and the goals they hope to achieve with their charitable investments. Letters not only serve as a record of the foundation’s history, but they can also serve as a means by which to formally invite the younger family members to consider becoming trustees.

Training and Education

By starting succession planning before the need to transition leadership arises, you can help your clients’ children to prepare for their roles as trustees. After all, successors need training and skill building to mitigate the operational inefficiencies that tend to occur when experienced leaders retire their positions.

For example, you might help clients to set up “mini foundations” or donor-advised funds with smaller amounts of money for their heirs to manage. Or, suggest that the family create a junior board of directors or that they set aside a pool of discretionary funds over which the next generation has spending authority. These structures can serve as training grounds, helping the next cohort of trustees learn and practice the governance and grant-making skills they will need to serve in leadership positions.

Another approach is to provide a budget, which allows next generation members to create their own learning plans based on the assumption that they will be most interested in the activities they choose for themselves. Members can use the funds to attend conferences, purchase resource materials, and participate in peer networks. When they eventually take office, this training will help new trustees to make better use of the family’s charitable assets.

Defining Board Eligibility

Another way in which you can help your clients is to help them define meaningful and relevant criteria to select the next generation of trustees. Remember: just because someone is a member of the family does not necessarily mean they have what it takes to serve as an effective trustee. A bevy of research on the topic of family foundation governance reveals that more inclusive boards are usually larger and often less efficient while more restrictive boards are usually smaller and more efficient. Work with your clients to draft eligibility requirements that take into account:

·      How multiple branches of a family will be represented on the board;

·      How spouses will be involved in board leadership;

·      The specific criteria (in terms of age, education, volunteer service, etc) that would make family members eligible to serve as trustees; and

·      Geographic requirements. For instance, do board members need to live in the same geographical region where the foundation directs its funding? If the family is spread out in several regions, do they all need to be represented?

You might suggest developing job descriptions for board members and officers. Help families to decide what qualities and skills they think are most important for a foundation trustee to possess. If responsibilities are clear from the start, potential trustees will understand what the expectations are.

Mitigating Conflict

It’s not just the younger generations that need to prepare for this transition; it’s also the older generations who either established the foundation or who have served as trustees for a number of years. It may be exceedingly difficult for them to relinquish the reigns—especially given the personal and defining nature of one’s philanthropy. Consider creating a non-voting Emeritus position for founding members. In this role, they can serve as advisors and mentors to the board while allowing the next generation to lead and make decisions.

The succession planning process will inevitably involve a certain degree of conflict as any exercise in family collaboration does! Suggest that your clients draft a conflict management plan in order to establish guidelines for managing disagreements. For example, some families require consensus before a making a decision, others develop a compromise strategy whereby the “losers” of one decision are ensured a “win” in another decision.

Good Business Sense

Keep in mind: succession planning is a process, not an event. If you and your clients require guidance, consult with a philanthropy advisor who has experience helping families with foundation governance and successful succession. By helping your clients to prepare for and implement leadership transitions, you will find that you are able to form multi-generational relationships with clients’ families, ensuring that their assets remain under your management for years to come.

Meg Lassar is an analyst for Strategic Philanthropy, a philanthropic advisory practice based in Chicago.


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