As charitable entities, private foundations have proven to be incredibly successful engines of positive change. In the 20th century, private foundations helped bring about everything from Sesame Street to the white lines on the highways and the 911 emergency system, and their transformative work continues, powering solutions to environmental challenges, poverty, and other persistent problems.
Although the funds and activities of private foundations serve the public, these charitable vehicles do offer significant benefits for donors as well, enabling them to:
Leave a Personal and Family Legacy
The majority of foundations are set up to exist in perpetuity. This means that control over the foundation and its assets can be passed to countless generations of family, perpetuating your values, continuing your charitable work, and burnishing your name far beyond your lifetime. Today, Carnegie and Rockefeller are better remembered for their philanthropic legacies than for their accomplishments in the steel and oil industries. And because gifts are made from an endowment that generates investment revenue, the total gifts made by the foundation over time can far surpass the initial funding.
Engaging Family in Philanthropy
A private foundation provides ample opportunities for teaching children and young adults about giving back while making philanthropy a family affair. Here are five of the most important benefits of a private foundation for families:
- They help instill values and traditions: Involving the next generation in your philanthropy is one way to ensure that your family’s charitable legacy endures. The process of working together as a family can instill philanthropic values that last a lifetime. Moreover, because private foundations are often established to exist in perpetuity, handed down from one generation to the next, your foundation can produce generation upon generation of individuals who are committed to making a difference.
- Maintain family ties: In our increasingly geographically dispersed society, the family foundation can be the glue that maintains connections as family members move to pursue college and start careers and families across the country or even the globe. Foundation meetings and regular opportunities for collaboration provide a “non-Thanksgiving” reason for the family to get together, talk, and share how they might make a difference.
- Deepen social consciousness: The rapid pace of modern life offers few opportunities for families to work together on significant issues that are meaningful to them. Competing priorities—work, kids’ activities, social obligations, exercise, entertainment and travel—make it difficult for families to find time to talk about things that matter, let alone take action on those issues. For many families, the private foundation becomes the “hearth” around which multiple generations gather to discuss problems they would like to see resolved. In the process, family members get to know each other on a whole new level—moving conversations beyond “what did you do today?” to discussing issues truly important to the family.
- Increase personal fulfillment: Giving can make us happier. In a classic exercise, psychologist and researcher Martin Seligman asked his students to engage in one pleasurable activity and one philanthropic activity and then write about both. According to the students’ accounts, the perceived aftereffects of the fun activity (watching a film, eating ice cream) paled in comparison to the altruistic venture (volunteering in a soup kitchen). Why was this? The research indicated that the process of giving took the students outside themselves. The total engagement and loss of self-consciousness they experienced when helping others had a stronger and more lasting impact than the short-lived stimulation of the “fun” activity.
- Develop “real-world” skills: Involving the younger generation in the foundation can build practical competencies such as leadership, teamwork, investment management, negotiation, and social awareness. While the family foundation can provide young adults with significant opportunities for career development, even school-age children can benefit from the opportunity to apply their developing skills.
So what is the right age to start exposing your children to philanthropy? Some clients feel it’s a good idea to start as early as possible, opining that life’s lessons are taught early across the dinner table. That way, by the time children are old enough to join the foundation, philanthropy has already been an integral part of their lives. Other clients feel it’s better to wait because a heavy-handed approach can backfire and lead to resentment or rebellion. They believe that delaying until a young person is ready to take on the responsibility of foundation involvement fosters a genuine desire that comes from a place of maturity. In our view, there is no right choice—each family must make its own decision. Whichever path you choose, engaging the next generation should be an ongoing process that is constantly reinforced, not a one-time event.
Receive Tax Deductions & Other Benefits from Charitable Giving
Giving through a private foundation offers tremendous advantages over giving as an individual. Not only can you magnify your philanthropic impact, establish your personal legacy, and help bring your family together, but they offer these financial benefits as well:
Tax Savings for You and Your Estate
Giving to a private foundation may make it possible for you to:
- Reduce your income tax for each year in which you make a contribution
- Avoid capital gains taxes depending on the characteristics of property contributed
- Reduce or eliminate potential estate taxes
- Grow your charitable funds in a tax-advantaged environment, and pass control of them to future generations to continue your philanthropy.
Income Tax Savings
One of the more immediate tax benefits is that a donor will receive an income tax deduction for any amount he or she contributes to a private foundation up to 30% of the donor’s adjusted gross income (AGI). Although you get the tax deduction up front, you can make your charitable deductions over time, enabling you to give thoughtfully.
Capital Gains Tax Savings
In addition to a deduction for income taxes on gifts to a private foundation, donors may also be able to avoid paying capital gains taxes by donating highly appreciated assets to a private foundation. For example, if a donor were to give appreciated stock to a foundation, he or she would be entitled to receive an income tax deduction for the full, fair-market value of the stock. When the foundation decides to sell the stock in the future, it will pay only the nominal excise tax of 1% or 2% on the net capital gains.
Estate Tax Savings
When assets are contributed to a private foundation, they are excluded from the donor’s estate and, as a result, are not subject to either federal or state estate taxes. For high-net-worth individuals who have a strong charitable interest, private foundations offer an opportunity to avoid paying estate taxes while simultaneously creating a lasting philanthropic legacy.
Because assets you contribute to a private foundation will be able to grow in a tax-advantaged environment, over the years, the foundation’s value will likely exceed the total amount of your contributions—despite making regular charitable grants. The result will be a significant charitable legacy that your heirs may continue to control and pass down to future generations in perpetuity.
Tax Benefits of Creating a Private Foundation - For Donors
In addition to the many philanthropic and charitable reasons a donor might have for establishing and funding a private foundation, there are also short-term and long-term tax benefits to consider.
Pay Expenses and Hire Staff
Private foundations have latitude denied to other types of charitable vehicles. For example, they can pay charitable expenses and hire staff—even family members.
When you have a private foundation, all legitimate and reasonable expenses incurred in carrying out your philanthropy count toward your foundation’s minimum distribution requirement (the IRS requires that private foundations distribute at least 5% of average investment assets annually). Travel expenses for site visits, board meetings, conferences, office supplies, and even our fees at Foundation Source qualify.
Federal tax law permits foundations to pay “reasonable compensation” to qualified staff—even if the foundation is staffed by your family. Foundation Source’s optional Compensational Benchmarking Program is available to clients who want to ensure that compliance with IRS regulations.