I just setup a private family foundation. Can I hire a staff to run it?
The answer often turns on the size of the foundation assets and its total annual charitable budget. The real question is how much staff you can afford.
The IRS mandates an annual charitable expenditure of at least 5% of assets. This figure includes grants and administrative expenses. Research by the Council on foundations shows that the median administrative expense level in relation to the total charitable budget for all private foundations is approximately 9%. Newly established, smaller foundations won’t have the same economy of scale as a larger, older, foundation. Therefore, as a rule of thumb administrative expenses for smaller foundations should be no more than 15% of of their annual charitable budget.
How much staff can I afford?
A little quick math can determine how much room you have to pay for staff and other administrative expenses. The two examples below will give you an idea how this works:
For example, let’s assume you form a foundation with $1,000,000 in assets.
1. Your annual charitable budget, based on a minimum charitable expenditure of 5% of assets, would be $1,000,000 x.05 or $50,000
2. Your annual administrative budget, based on our rule of thumb from above, would be $50,000 x .15 or $7,500 (on a monthly basis this works out to $625.00 (so, not a very big budget).
At this budget level, the foundation cannot really afford a staff. Therefore, the foundation will have to rely on a volunteer board to review all grant requests, handle all correspondence and grant making investigations and otherwise run the foundation. But, if your foundation is a bit bigger, a small staff may be feasible to handle some of these responsibilities.
For example, let’s assume you form a foundation with $5,000,000 in assets.
1. Your annual charitable budget, based on a minimum charitable expenditure of 5% of assets, would be $5,000,000 x.05 or $250,000
2. Your annual administrative budget, based on our rule of thumb, would be $250,000 x .15 or $37,500 (on a monthly basis this works out to $3,125.00 (still not a big budget, but a full-time assistant is now feasible).
As your foundation grows, so will its financial capabilities to hire and retain good people. However, with family foundations, the founder will generally want to instill a spirit of giving into his or her children. This philanthropic vision will allow the foundation to continue across multiple generations creating a legacy of good works.
If you have any additional questions about forming a private family foundation, call the Perliski Law Group today.