Pellet, Jennifer, Chief Executive (U.S.)
How to more than just money on to your children. BY JENNIFER PELLET
If you're like most parents, you want the best for your children. You want, in fact, to give them the world. But you probably also worry that too much too soon could scud them down a path of conspicuous consumption-or worse, destructive overindulgence. "So much of estate planning today is about how to tax efficiently move money from one generation to the next, but at some point the wealth transferred will be neither helpful nor productive," says Douglas K. Freeman, chairman and national managing partner of IFF Advisors, Irvine, Calif. "It creates a sense of dependency on someone else's wealth, which is the opposite of how the wealth creator made the money in the first place."
Ideally, the children of wealthy parents will be guided to an appreciation of the wealth they receive, as well as the values and responsibility that come with it. The challenge, of course, is how to get them there.
For philanthropically minded parents, a family foundation-a private foundation in which the founder or the founder's family plays a significant governing role-is one solution. Creating such a foundation simultaneously creates a lasting charitable legacy and instills a sense of fiscal competency and responsibility in successive generations, says Freeman. "A family foundation is a wonderful platform to teach your kids the skills required of a competent adult, such as leadership, collaborative decision-making, communication, fiduciary responsibility and accountability," he explains.
That said, the legal structure and financial and administrative commitment required for the family foundation won't every family's needs. Two potential hurdles are financial commitment and tax ramifications. Because the law requires that foundations distribute 5 percent of their value per year in grants, consensus holds that a fully funded foundation should hold $1 million or more to be fiscally sound. However, the foundation can be set up for $5,000 and funded, at least initially, with $100,000 or less. "It takes on average 18 years to fully fund a foundation," says Freeman, "so it's more about how much you plan to contribute over your lifetime than how much you can contribute on the front end. …