Private Foundation

What happens when you give appreciated qualified securities (usually marketable securities) to a private foundation?  1) You can generally deduct a percentage of the fair market value of your gift as a charitable deduction on your income tax return–carrying forward any unused portion for up to five years, and 2) neither you nor the private foundation pay capital gains tax.

You can readily see that these are important advantages.  Here’s an overview of other benefits of and requirements for setting up your own foundation to help you determine whether it would be advantageous for you.

Foundation Benefits

you. Some restrictions may apply and a private foundation has the added burden of having to maintain records and meet IRS and state filing requirements.  But installing a private foundation may well be worth the bother because it offers several benefits.  Foundations allow you to:

Carry out your own charitable objectives.  Perhaps you haven’t found a public charity that can address your specific charitable objectives. By innovating your own foundation you can set guidelines for it to carry out.

Taking a big tax deduction.  Suppose you anticipate having an unusually large amount of income this year that you would like to offset with a large charitable deduction.  But you don’t want your favorite charity to receive the entire donation in a single year.  The solution is to make the large gift to your favorite foundation and obtain a current income tax deduction.  The foundation can invest the funds and spread the contribution to charity over the next three or four years.  Your foundation get 100 cents on the dollar.  Your estate will include some assets that can be subjected to both income and estate taxes.  These include:

• Profit Sharing and 401k plans
• Pension Plans
• Individual Retirement Accounts
• Tax-deferred annuities
• Deferred Compensation
• Deferred Earnings

In some situations, your heirs may net only 18% to 20% of the value of these types of assets after all taxes are paid.  But you can take an estate tax charitable deduction if you designate your private foundation as the beneficiary or the recipient of these assets — and the foundation will escape income tax on the assets.   As a result your private foundation will have 100 cents on the dollar to use for charitable purposes.

Teaching your children sound financial values.  You can provide that your children run your private foundation after your death or after you relinquish control.  Because the funds in your foundation cannot be diverted to non-charitable uses, your children will learn the importance of giving and the different purposes charities in the community serve.  A private foundation can last in perpetuity as long as it has funds.  If you want people to remember your family for its generosity and philanthropy, a private foundation named after you may accomplish that goal.

Social capital for you and your heirs.  As you and your family go about overseeing the assets in your private foundation very positive social interactions occur.  If you choose to you can request your family volunteer to sit on a “board” for your foundation and meet annually to discuss investments and distributions to selected charities.  These periodic get-togethers can serve as enjoyable focal points keeping family members and siblings in closer touch until and long after your passing.  Additionally consider the positive social implications for your family as past or potential annual donors to dozens of area charitable organizations seeking their contributions.

Just What is a Private Foundation

Generally, a private foundation is any tax-exempt entity that the Internal Revenue Code does not define as a public charity.  Among the many requirement governing foundations are these:

• The foundation must annually distribute to a public charity at least 5% of its net investment assets.
• The foundation is limited in its investments and ownership in a family business or other unrelated business, and
• The governing instrument must specifically bar self-dealing–including leasing, lending, selling or other transactions–between the foundation and you, your family, foundation managers and other disqualified persons. 

Perhaps the leading method to establish your own private family foundation, certainly the least complex and least expensive, is through Donor Advised Funds and Pooled Income Funds and their pre-approved IRS prototype documents that can be customized to fit the needs of the vast majority of situations.

For additional information on Private Family Foundations, Donor Advised Funds and Pooled Income Funds, Contact Us and we will be happy to mail you additional information.