Private foundations may help you achieve your philanthropic goals, but while they can prove deeply rewarding, they can also be time-consuming, expensive and complex.
A private foundation is a not-for-profit entity that is run by a single individual, family or business (in contrast to a public charity). It must be operated exclusively for purposes that the Internal Revenue Service deems appropriate for a charitable entity, such as educational and scientific purposes or prevention of cruelty to animals or children. Many, but not all, private foundations support their cause or causes of choice by making grants to existing public charities.
Several key characteristics of private foundations may make establishing one the most attractive option for a given donor:
Control. A private foundation puts more control in the hands of the person or group that creates it than do most other forms of charitable giving. When the foundation is established, the donor or donors specify its purpose and often take an active part in drafting the bylaws that govern how and when grants are made. The foundation’s directors will often include donors and their family members. That board will determine the specific beneficiaries of the foundation’s gifts. In many cases, the board will also determine the investment policy governing the foundation’s assets.
Tax advantages. When donors give to a private foundation, whether at the time it is established or later, they receive income tax deductions, subject to certain percentage limitations relative to adjusted gross income. That makes this a powerful estate-planning tool, because estate tax deductions for bequests to a foundation are unlimited. And once the foundation invests its contributions, the assets grow tax-free.
Flexibility. Given the extended time horizon for most foundations, their focus on an objective rather than a particular organization allows them to adapt as individual charities come and go. Since distributions are made in accordance with the foundation’s mission, there is no need for those who establish it to select particular beneficiaries. Instead, the board of directors can determine which recipients qualify at any given time.
Family involvement. Foundations often bear the names of the people or families who founded them, and this is not coincidental. Many donors are drawn to private foundations specifically because they can be used to encourage their families to become involved in their philanthropic work. Foundations can provide employment to adult children and grandchildren, as well as visibility or prestige for individuals involved at high levels. A foundation can also establish a legacy that may outlast the original donor or donors by generations. underpinning
Once you decide to establish a foundation, there is some preliminary work. Planning is critical to ensure that your foundation begins with a solid framework that reflects your goals. Ask yourself some key questions before you sit down to draft any establishing documents: What is your primary goal in creating this foundation? Who will do most of the work in establishing it? Where will the start-up capital come from? Who will run it once it is established, and how will it sustain itself?
Perhaps the most common type of foundation is a “private endowed foundation,” in which the assets form a principal, or endowment, that is invested by the board of directors. Annual distributions are intended to be made from the investment income, leaving the principal alone. The foundation must make annual gifts that meet or exceed 5 percent of the assets’ overall fair market value.
A “pass-through foundation,” by contrast, distributes all of the contributions it receives in a given year, whether cash or property. This status can be made or revoked on a year-to-year basis, and offers certain tax advantages.