Understanding Private Foundations

Senior older female executive CEO and happy multicultural business people discuss private foundation at boardroom table.

Presented by Kris Maksimovich, AIF®, CRPC®, CRC®:  A private foundation is a tax-exempt entity established by an individual, family, or corporation for charitable purposes. Private foundations are overseen by a board of directors or trustees responsible for receiving donations, managing and investing assets, and making grants to other charitable organizations. The board is also responsible for filing tax returns and managing other administrative reporting duties. This is different from a donor-advised fund, in which the sponsoring organization handles administrative reporting and filing.

How Private Foundations Differ from Public Charities

The key difference between a private foundation and a public charity is the funding source. Private foundations receive most of their support from a small number of contributors and are generally controlled by their founders or substantial donors. They frequently use charitable contributions to make grants to individuals or other charities rather than directly funding their own programs. Public charities tend to use charitable contributions to directly fund programs.

Private foundations operate independently and therefore have the freedom to ignore public opinion regarding the use of the foundation’s charitable assets. In contrast, public charities must solicit donations from the community on a regular basis and thus have to appeal to public sentiment. This can influence how the charity chooses to use its funds to carry out certain programs.

Types

Operating foundations. An operating foundation is directly involved in sponsoring and operating a charitable project or enterprise. It does not use assets to make grants to other charitable organizations.

Nonoperating foundations. A nonoperating foundation does not provide services or conduct charitable activities but instead makes grants to public charities that operate charitable programs. Nonoperating foundations must distribute 5 percent of their net investment assets each year in the form of qualifying distributions, such as grants.

Benefits

There are a number of benefits associated with starting a private foundation. By doing so, you can establish a legacy while also involving family members by making them employees or members of the board. As a founder, you have full control over the creation of grants, which can be used to support organizations you care about.

Contributions to a private foundation enable the donor to potentially receive an immediate tax deduction of up to 30 percent of adjusted gross income (AGI) for cash gifts and up to 20 percent of AGI for long-term appreciated publicly traded assets. Private foundations can accept many types of assets as contributions, but with gifts of long-term appreciated securities, the donor may potentially eliminate capital gains tax.

How Do You Establish a Private Foundation?

If you’re seriously considering starting a private foundation, we recommend you adhere to the following steps:

  1. Prepare a written plan that includes the foundation’s mission, the programs it will fund or operate, and the staff needed.
  2. Set up a corporation or trust whose assets will be exclusively dedicated to charitable purposes. In addition, determine whether the entity is eligible to receive charitable donations based on the category of the corporation or trust’s activity.
  3. Prepare financial projections, including the cash or assets that you will give to the foundation and any other revenue that you expect to receive.
  4. Request tax-exempt status from the IRS by completing IRS Form 1023 (i.e., the Application for Recognition of Exemption).
  5. Fund the entity and set up financial recordkeeping systems, such as adequate accounting and internal controls.
  6. File IRS Form 990-PF (i.e., the Return of Private Foundation) annually to avoid losing tax-exempt status.

Make Your Vision a Reality

If you think a private foundation is right for you, you don’t have to go it alone. I can help you connect with foundation administrators who can assist you with realizing your charitable vision.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at info@gwadvisors.net.

© 2022 Commonwealth Financial Network®

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