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

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.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers