No Evidence Family Foundations Claim Higher Expenses

Summary

In ongoing debates about charitable giving reform, questions have arisen about whether family foundations should be able to include the salaries and travel expenses of family members as administrative expenses that count toward the five percent payout requirement for private foundations, or if this should be reserved for nonfamily staff expenses. To aid in this discussion, the Philanthropy Roundtable examines whether family foundations have higher expenses relative to grantmaking than nonfamily foundations.

 

Policy Brief

In a February 2021 debate hosted by the American Enterprise Institute (AEI), Howard Husock and Ray Madoff discussed donor-advised funds (DAFs) and what—if any—changes should be made to DAF rules.¹

During the discussion, Madoff questioned whether family foundations should be able to count the salaries and travel expenses of family members as administrative expenses that count toward the five percent payout requirement for private foundations, or if this should be reserved for nonfamily staff expenses.

She said, “People are told that they can hire their children to work in the private foundation and they can spend their … time in Bermuda and deduct those expenses for when they have their family meeting. And we think these are really degrading to the sense of what the purpose of the charitable deduction is and that is why the proposals in the Initiative to Accelerate Charitable Giving would not allow those to count for purposes of the five percent.”

While Madoff’s comment is targeted at clear instances of abuse, she offered no specific evidence this is widespread through family foundations. Surely one can hypothesize scenarios of misuse of funds and conflicts of interest for any type of organization. However, her underlying skepticism raises a question—do family foundations have higher expenses relative to grantmaking than nonfamily foundations?

One multi-year prior research project concludes the answer is “no.” In 2008, the Urban Institute, the Foundation Center, and Philanthropic Research, Inc published a study called, “What Drives Foundation Expenses & Compensation: Results of a Three-Year Study.”² The authors sought to determine what factors drive administrative and operating expenses by analyzing expense and compensation data from the 10,000 largest foundations in terms of giving.

The authors describe charitable operating and administrative expenses as “costs incurred by foundations related to their charitable mission,” including expenses for grants administration and non-grant charitable activities, such as accounting or legal services. As these expenses count toward the five percent payout requirement for foundations, much attention is—and should be—devoted to determining whether these expenses are justified in terms of meeting a foundation’s charitable mission.

 

Key to the authors’ findings is that family foundations tend to have a smaller percentage of administrative expenses relative to total qualifying distributions than nonfamily foundations. They conclude, “family involvement is one of the few characteristics that notably reduces the charitable administrative expense–to–qualifying distribution ratio for staffed foundations.”

This holds even for the largest family foundations. In fact, the 2006 iteration of the Urban Institute study found as larger family foundations achieve economies of scale, the expense ratio consistently declined as giving increased.⁴ But the nonfamily foundations  did not report the same economies of scale. The authors say, “The difference in charitable expense levels between family and nonfamily independent foundations was greatest for the largest foundations—less than four percent compared to over eight percent.” 

 

The Urban Institute et al study found that:

 “The lower median expense–to–qualifying distribution ratios for family foundations compared to nonfamily foundations suggests that family members hold staff-related costs down by providing no- or low-cost labor for administering grants and other programs. Some family members also contribute office space and administrative services, such as legal and accounting, thereby lowering expenses.”

Footnotes