Private foundations have been a popular and effective method for wealthy families to create a family legacy of philanthropy. Much good has resulted in communities at large by the creation and use of private foundations. Billions of dollars have been given over the last century and beyond to benefit society. Congress has greatly limited the tax benefits of private foundations, but they may still be a suitable giving vehicle if control is the major objective in giving.
The typical donor:
- Has a larger than average estate.
- Wants to time the gift to his or her tax situation.
- Desires to involve family and heirs in gift-making decisions.
- Wants to give now, but not sure which charity he or she wants to benefit.
Gift features and benefits:
- Must distribute a minimum of 5 percent of the fair market value annually
- An annual excise tax of 2 percent on net investment income
- Gives you more control than a Donor Advised Fund or Support Organization
- Creates philanthropic training ground for family
- Allows family involvement after your death
How Do I Make a Gift Using a Private Foundation?
Your legal and financial professionals can assist you in drafting the necessary documents to create a private foundation. Specific provisions in these documents will be tailored to meet your individual and family desires. Philanthropies' professional advisors will be happy to consult with you and your professionals.
Care must be used in choosing giving options associated with a private foundation. Once the foundation is created, prohibited transactions must be avoided, such as self-dealing, failure to meet distribution rules, excess business holdings, speculative investments, and lobbying efforts or other noncharitable distributions.
Other Facts You Should Know about Private Foundations
There are many advantages of a private foundation:
Personal advantage: creating a private foundation is in essence creating one's own personal charity; a private board is hand selected for the foundation.
Family advantage: a donor and his or her children frequently constitute the entire board of a private foundation; a private foundation can provide a structure for a family's charitable activities; family members can be involved in making grants and helping future generations understand the meaning of philanthropy.
Control advantage: private foundations provide great freedom and spontaneity in gift giving. The donor and the foundation's board have absolute control and can hire their own staff; they can choose which charities to benefit.
There are also some disadvantages of a private foundation:
Expense: legal counsel must be obtained to create a private foundation; the start-up and administrative costs for creating a private foundation are high; the 2 percent excise tax on net investment income and other financial disadvantages can affect your ultimate giving ability.
Detailed administration: you are responsible for record keeping and tax return preparation for the foundation; detailed reporting and allocation of expenditures are required; this adds to the expense of creating a private foundation and also adds to its complicated nature.