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What is a private foundation? |
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A private foundation is a special, not-for-profit entity that is controlled by an individual, family or business. It is organized exclusively for charitable, educational, religious, scientific and literary purposes under Section 501(c)(3) of the Internal Revenue Code. In order to qualify as a private foundation, and for the contributions to be deemed tax deductible, the entity must be recognized by the IRS as a qualifying tax-exempt organization.
Private foundations provide a flexible, tax-efficient method whereby donors may receive an immediate tax deduction for charitable donations that are made in the future.
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| 2. |
How does a private foundation differ from a donor advised fund? |
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They differ both in control and flexibility. Contributors to a donor advised fund make irrevocable contributions to a nonprofit organization that administers the fund and makes decisions regarding fund investments. Contributors may recommend eligible charities as recipients for grants, but the fund's governing body is free to accept or reject the recommendations.
With a private foundation, there is greater flexibility and control. Private foundations can typically accept and hold a much wider variety of assets, such as 144 restricted stock and hedge funds, and the founder retains control over how the assets are invested. In addition, the founder retains control over the charitable donations and other foundation disbursements. Foundations are also able to hire staff, reimburse expenses, and set up structured giving programs, such as scholarships.
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| 3. |
What is the minimum size for a new foundation? |
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Traditionally, the rule of thumb stated that a private foundation did not make sense unless the initial funding was $3 - 5 million. This was due to the complicated nature of setting them up and the ongoing expenses to keep them running.
Foundation Source has revolutionized the private foundation by developing technology and efficient processes that dramatically streamline the delivery and ongoing administration. Foundation Source makes it possible to establish a foundation with as little as $250,000, yet provides services that are robust enough for foundations up to $250 million and more.
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| 4. |
Who can a private foundation give money to? |
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Private foundations typically carry out their philanthropy by making grants to public charities. Foundation Source provides its clients with an online database of over 1 million IRS-approved charities that foundations can use to research potential grants. Foundation Source will also help donors with more advanced grantmaking needs such as scholarship programs, and give hardship and emergency assistance grants directly to individuals.
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| 5. |
What are the basic rules governing a private foundation? |
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Foundation Source provides expertise on the rules and regulations governing private foundations, and monitors foundation activity daily. This lets individuals focus on the rewards of a private foundation, charitable giving. Some of the rules which apply include:
- Donations to a private foundation may only be used for charitable purposes and certain administrative expenses.
- Typically, donations to a private foundation are tax deductible up to 30% of adjusted gross income for cash and up to 20% of AGI for appreciated securities, with a five-year carry forward. Individuals should consult with their tax advisor.
- A private foundation must donate 5% of its average net assets from the preceding year to charitable causes. (This may include some administrative expenses.) Foundation Source calculates the remaining required distribution on a daily basis and posts it on the foundation web site.
- Non-operating private foundations, which account for 94% of all foundations, primarily exercise their philanthropy by making grants to 501(c)(3) public charities. Foundation Source also makes it easy for foundations to give money to individuals via scholarships, awards, and hardship/emergency assistance grants.
- Private foundations are precluded from giving money to political campaigns or organizations that exist to influence legislation and voting.
- The IRS strictly prohibits self dealing. Disqualified individuals (the donor, lineal descendants and antecedents, e.g., parents and children, and people under their employment) may not engage in transactions with the foundation, except to make donations to it, or, under limited circumstances, to receive fair market value compensation for services. Examples of self dealing include:
- Purchasing items from or selling items to the foundation.
- Personal use of foundation assets or income.
- Borrowing money from the foundation.
- Retaining foundation assets (e.g., paintings) on private premises.
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| 6. |
Can family members be involved in the foundation? |
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By appointing children and other family members as officers and directors, the foundation can serve to unite the family in philanthropy and pass values on to younger generations.
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| 7. |
Can family members be paid by the foundation? |
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Paying family members requires strict adherence to IRS rules. To avoid the potential for legal problems and penalties, individuals should consult with an attorney.
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| 8. |
Does Foundation Source custody or manage the foundation assets? |
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No. Foundation Source does not provide financial advice or custody assets. Donors continue to work with the financial advisors they know and trust.
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| 9. |
Can foundations continue to work with existing legal, tax and financial advisors? |
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Foundation Source does not provide legal, tax or financial advice. We will work with the individual's current advisors as needed, or provide the names of specialists in this area.
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