What is a private foundation?
A private foundation is a charitable foundation established by an individual donor to manage the donor’s charitable contributions. Charitable foundations date back to 347 B.C. – Plato designated income from his estate to support his academy which thrived for 856 years! One advantage of a private foundation is a tax deduction to the donor’s income tax return or estate tax return. It is the private foundation which engages in charitable activities, not the donor.
How do you establish a private foundation?
A private foundation can be formed during your lifetime or upon your death. Some people can establish a private foundation with as little as $100,000 during their lifetime and then fund a larger portion at death. The structure of the private foundation can be in the form of a trust or a corporation. There are reasons to choose one form over another which should be explored during any meeting with your lawyer about forming a private foundation. Once the entity is established, an IRS Form 1023 must be filed to obtain a determination letter from the IRS that the private foundation is a tax exempt entity.
What are the tax advantages?
A gift of money to a private foundation is subject to a deduction limit of 30% of your adjusted gross income. If you make gifts of property other than money, then the deduction limit may be less than 30% and the amount of deduction may be limited to your cost basis in the property contributed. If the contribution exceeds your adjusted gross income, you may carry forward the deduction for up to 5 years. If you make a testamentary gift to a private foundation, your estate will receive a charitable deduction for the full value of the property contributed. There are restrictions on the types of assets that can be contributed to a private foundation, so you will need to confirm that you can contribute that asset if it is something other than cash. Since families are involved in the operations of the private foundations, there is a danger that an action will be taken by a family member or someone closer to the donor that is deemed to be self-dealing. Care should be taken and advice sought to avoid such actions.
What are the disadvantages of a private foundation?
The private foundation must distribute 5% or more of the value of its assets annually. There is an annual excise tax of 2% on the net investment income of the private foundation. There may be additional excise taxes if the private foundation violates any operational restrictions.
What are the advantages of private foundation?
The donor’s family can maintain control and be involved in the operation of the foundation, including the charities that will benefit from the foundation’s activities. The assets in the private foundation grow tax-free if there are no rule violations and lifetime gifts are not included in the donor’s estate for estate tax purposes. There are tax deductions available to the donor during life and/or death. Private foundations are excellent techniques to transfer to younger family members the value of philanthropy and good business practices. Many families use private foundations to pass the family values to younger generations. This may help bring the family closer with the shared values and/or mission of the private foundation. .
If you have a charitable intent, a desire to pass ethical and philanthropic values to younger generations, and are motivated to train responsible young members of your family, you should explore whether a private foundation will for you and your family.
