A private foundation allows you to make gifts to an unlimited number of charities over time and to involve family members in the decision-making process.
Private foundations may be organized as non-profit corporations or as wholly charitable trusts, but the key requirement for either structure is that all of the assets be dedicated to charitable purposes. Assets contributed to a foundation cannot be withdrawn.
- Most private foundations are grant-making foundations that make financial contributions to public charities selected by their trustees, board, or grant-making committee.
- Some private foundations are operating foundations that directly fulfill a charitable function by providing some service to the public, e.g., operating a museum or soup kitchen.
- Private foundations are exempt from income tax, but must pay a 2% excise tax on net investment income, including capital gains; excise tax may be reduced to 1% under certain circumstances.
- Typically, donations to a private foundation are tax deductible up to 30% of adjusted gross income for cash and up to 20% of AGI for appreciated securities held more than one year with a five-year carryover. Gifts of appreciated publicly traded stock are generally deductible at fair market value, but gifts of non-marketable property are limited to tax cost. An unlimited estate tax charitable deduction may be available for transfers made at death.
- Private foundations are required to pay out at least 5% of the prior year’s net asset value, based on a monthly average. Distributions in excess of the minimum carry over to satisfy the minimum distribution requirement in future years.
Corporation vs. Trust
- For private foundations organized as non-profit corporations, family members may serve on the board as directors of the foundation.
- A private foundation organized as a trust may have an individual and/or corporate trustee, often with an advisory committee (family members) that selects charities to which grants are made.
- One major attraction of a private foundation is the control it offers. If the foundation is formed during your lifetime, the donor may serve as sole trustee, may control a board of trustees or directors through veto power, or may appoint family members, friends, and associates to a board with full removal power.
- Many donors conclude that a private foundation is the ideal vehicle to promote family philanthropy. Hands-on involvement by donor and/or family members is common. And by being actively involved in the grant-making process, a donor’s children learn not only about philanthropy, but are introduced to portfolio management and the importance of budgeting and cash flow management.
- A private foundation also offers income and estate tax savings: an income tax deduction is available for all lifetime gifts made by you or others; and contributions of publicly-traded stock, for example, can significantly reduce estate tax liability.
- A private foundation may be used with other charitable giving vehicles, such as charitable trusts. For example:
- A charitable remainder trust (CRT) can first make payments to you or a family member for life, with the remainder funding a private foundation.
- A charitable lead trust (CLT) could first fund a private foundation via annual payments over a term of years, with the remainder going to children or grandchildren.