Is a Private Foundation the Best Way to Give?

To be a better philanthropist, learn how private foundations work.

Jul 19, 2014 at 2:15PM

As a charitable donor, or philanthropist, you have a number of structures and vehicles available to use. In addition to a donor-advised fund, which I have previously written about, you can also set up a private foundation. Not all foundations are the size of The Bill and Melinda Gates Foundation, which currently has $40 billion in assets. Most are more modest in scale and are grant-making foundations, which is the type covered in this article. Here is some basic information about private foundations -- their requirements and use.

Dollar Cycle

Source: Flickr user opensource.com.

A private foundation is a tax-exempt nonprofit organization that is managed by its own trustees and directors. Irrevocable, tax-deductible donations are usually given from a single source, such as a family or corporation, to create a foundation's fund or endowment. Donations made to the foundation as part of a will or estate are also not subject to estate taxes. Family foundations tend to have ongoing family involvement from their donors, who can serve as volunteer trustees or directors. Foundations support social and environmental causes, and must benefit the public, primarily by making grants to other nonprofit organizations.

Requirements
Private foundations are legal IRS-designated organizations and are required to file a 990-PF form with the IRS annually. Each foundation is also required to pay out at least 5% of its assets each year. Although IRS rules are subject to congressional legislation, they have historically been subject to a 1% or 2% excise tax on net investment income. A foundation may not be used to enrich the donor, their family, or their friends -- this is called self-dealing.

Advantages and flexibility
A private foundation is more appropriate for charitable givers who want more control and engagement than are available with other vehicles. The investments of a private foundation are managed by the foundation, though these investments and assets are somewhat limited by IRS rules. Grants are also directly controlled by the foundation itself. In addition, foundations have some unique flexibility, including the ability to make grants to individuals in cases of emergency or hardship, and even foreign charities that are not recognized by the IRS. Foundations can also create and run scholarship programs.

In fact, when they are made for charitable purposes, private foundations can also provide loans, loan guarantees, and equity investments. These program-related investments, or PRIs, allow foundations to recoup their investments, which can then be reallocated to new charitable purposes. A private foundation can direct some of its own charitable programs for those who want to do hands-on implementation.

Limitations and disadvantages
Individual income-tax deductions for gifts to private foundations are lower than those to public charities; foundation gifts are limited to 30% of the donor's adjusted gross income, or AGI, for gifts of cash, and 20% of AGI for gifts of property. Donors to private foundations also face valuation limitations that donors to public charities don't. With gifts of long-term appreciated property, such as real estate, closely held business interests, and tangible personal property, donors are limited to the tax basis amount. However, with gifts of long-term appreciated publicly traded stock or mutual funds, donors to private foundations can deduct the full market value.

Depending on the financial scale of the effort and capacity to run them, private foundations can be more expensive to establish and maintain than other charitable-giving vehicles. In addition, private foundation boards -- which, in family foundations, often include family members -- have the potential for personal liability and are subject to penalties for distributions or expenses not allowed by law. As you may have already noticed, private foundations have complex rules and can be challenging to run without staff support. For this reason, some have the impression that private foundations only make sense if you have significant resources for philanthropy -- at least in the millions.

However, in 2010, according to the IRS, of the 86,245 private foundations, 80,064 had assets under $10 million, and 56,186 of them had assets under $1 million. At least a few hundred thousand dollars in assets is recommended for it to be worth the time and expense of setting up and running a private foundation.

Private foundation resources
Although you may have to pay for legal and accounting support to set up and maintain a private foundation, there are resources to help you along and keep your time commitment and operating costs down.

  • Foundation Source is the largest provider of support services to private foundations, doing virtually everything you might need, primarily through the Web.
  • Some community foundations and private banks offer management services to private foundations.
  • The Council on Foundations can help educate you and keep you informed about running a foundation.
  • Exponent Philanthropy (formerly The Association of Small Foundations) is a membership organization geared specifically for foundations that choose to keep their operations small, regardless of the scale of their resources.

Setting up a private foundation is an enduring commitment to philanthropy. If it seems like it would suit your charitable aims, talk to a philanthropy specialist, your family, and legal or tax advisors.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Fool contributor Mark Ewert is in no position to give investment advice, so he sticks to charitable giving and philanthropy. His new book, The Generosity Path: Finding the Richness in Giving, is a resource for anyone who wants to be a more skillful charitable giver.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers