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.

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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.

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.

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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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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