There are a variety of charitable vehicles to choose from to meet your philanthropic goals. One such vehicle is a private foundation. In recent years, some private foundations, like the Bill and Melinda Gates Foundation, have received much media attention for advancing their causes. A private foundation is like your own personal charity. The private foundation rules allow donors to control and operate the foundation in their capacity as trustees or directors.
A private foundation whose trustees or board of directors are family members is known as a family foundation. Family foundations are usually only grant- or gift-making entities and do not operate charitable activities. Grants are made to other tax-exempt organizations.
If your intention on a continuing basis is to have the family actively participate and receive a sense of satisfaction from grant making, the family foundation may be the vehicle of choice. However, due to the complexity of the rules, the start-up and ongoing administration requirement, including filing an annual tax return, may require the assistance of a qualified professional.
A private foundation is a separate legal entity, usually an exempt corporation or trust. Like a public charity, private foundations need to apply for tax-exempt status for donors to receive deductible charitable contributions. Once exempt status is granted, donors can donate cash or securities and receive a tax deduction equal to 20 percent for securities or 30 percent for cash of their adjusted gross income. Such contributions also remove assets from their estate. For contributions of appreciated publicly traded securities, you can donate to a private foundation and receive a tax deduction for the full fair market value of the securities without being taxed on the appreciation.
Because the operation of the foundation is susceptible to abuse, there are a number of rules to ensure proper administration. Violations can result in substantial penalties. A private foundation cannot engage in any prohibited transactions (such as the sale or lease of property) with foundation insiders, such as substantial contributors, foundation managers and certain other related persons. There is a minimum distribution requirement that mandates qualifying distributions of at least 5 percent of the fair market value of the foundation’s non-charitable assets be made annually. A private foundation combined with all insiders cannot own more than 20 percent of any corporation or other business entity. This includes owning a jeopardizing or speculative investment. Private foundations are also prohibited from making payments for political campaigns, influencing legislation or making certain grants to individuals.
However, a bona fide scholarship program is permitted for non- foundation insiders. Although known as tax-exempt, private foundations do pay tax on 1 or 2 percent of their net investment income depending upon their circumstances.
To ensure compliance with the various rules, private foundations are subject to annual reporting requirements that are also available for public inspection. Failure to meet the filing requirements for three consecutive years will result in revocation of tax-exempt status and taxation as a corporation or trust, depending upon the legal formation.
Due to the complexities involved, private foundations are normally formed for sizeable contributions and are created by donors who take a more formalistic approach to their charitable giving for both themselves and their future generations.
If you and your family are committed to the tangible and intangible rewards of charitable giving, the use of a private foundation may be an opportunity.
Mary-Ann F. Schaller can be reached at Email or 215.441.4600.
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