Family values: how to pass more than just money on to your children.

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 send 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 fit 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."

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Since deductions for foundation contributions are limited to 30 percent of adjusted gross income (as opposed to the 50 percent limit on contributions to a public charity), funding your foundation over time may be a smart move. But that's not the only tax wrinkle. Be forewarned: non-public appreciated assets such as real estate or artwork, which are deducted at market value when donated to a charity, warrant only the lesser of the asset's fair market value or their original cost when given to a private foundation.

A family foundation also requires commitment and careful planning. To run it effectively, a family needs a leadership structure, a mission and succession planning built into the bylaws. Ideally, the structure will also call for an independent director and a path to mediation should disagreements surface. "Conflict is always an issue when you're dealing with family," notes Jeffrey A. Galant, a partner of Goodkind Labaton Rudoff & Sucharow in New York, who specializes in tax, estate and succession planning for family business owners. "Much like with a family business, you can have egos get in the way, differences of opinion or someone on a power trip."

An effort should be made to engage the younger generation in foundation work at an early age. "Starting young is really the key to whether your kids will embrace the family's philanthropic efforts," says Susan Price, managing director of foundation services at the Washington, D.C.-based Council on Foundations and author of The Giving Family. She recommends involving children from kindergarten age on and that involvement can mean simply learning about the foundation's mission, going on a site visit to a prospective grantee or serving on a junior board charged with making grant recommendations to the foundation board.

While giving through a family foundation is complex and more demanding than a straightforward charitable donation, for many the trade-off is worth the autonomy and personal rewards of creating a charitable legacy. "A private foundation gives people who have a philanthropic interest a vehicle to carry out their vision, and a way to unite their family," says Galant. "It gets everyone working together behind a common cause."