Have you ever started training for a race (maybe a 5K, 10K or half marathon) but not yet known exactly which date and location it would be? A private foundation offers some potentially similar benefits in many ways. Basically, a private foundation is an excellent vehicle for a family to get an immediate tax deduction for charitable giving—without requiring them to decide yet which organizations or causes are the beneficiaries.
What Is a Private Foundation?
A foundation is considered “private” when it receives less than one-third of its support from the general public. Private foundations are required to distribute a minimum amount by the taxable year-end subsequent to the donation year. At least 5% of the organization’s average fair market value of assets held for investment must be given annually toward the charitable purpose of the foundation. (Note: Any funds used to further the exempt purpose of the private foundation qualify toward the annual giving requirement.) In addition to giving to other qualified charitable organizations, private foundations allow for the contribution of funds directly to individuals who are in need using dollars previously deducted for tax purposes by the donors.
Two Benefits of Utilizing a Private Foundation
Having the right tools and training plan can improve training effectiveness for that 5K race. Similarly, a private foundation can create monetary successes when used:
- As an effective tax planning tool. The donations made to a private foundation are tax deductible at the date of the contribution. The private foundation, however, has an entire year after its tax year-end to give part of that money to qualified charities or spend the money on the organization’s exempt purpose. This situation creates a very effective tax planning tool. For example, taxpayers can wait until December to determine how much to give based upon their tax situations, and they then have another year to choose the beneficiary organizations.
- In perpetuity: A private foundation can be set-up in perpetuity and serve as a vehicle for giving for future family generations. If invested wisely, the funds can grow over time and generate investment income so that the gifts surpass the actual funding. Plus, it leaves a legacy that can allow a family name to endure far beyond one taxpayer’s life.
Steps for Creating a Private Foundation and Ongoing Requirements
Private foundations are organized in the same manner as other charitable organizations. The general steps are:
- Draft a mission statement.
- Incorporate the organization in its state of domicile
- Obtain an Employer Identification Number.
- File Form 1023 to establish the organization’s tax-exempt status with the IRS.
Once created, a private foundation is subject to continuous requirements. Specifically, the foundation directors are responsible for performing calculations of the minimum annual giving requirements and ensuring donations are timely. Penalties can reach 100% of the contributions requirement not met—which can cause upheaval in the board and in the family.
Lace Up with CRI’s Nonprofit Team
Private foundations can be a significant resource to expand a family’s philanthropic goals while also serving as a vehicle offering substantial tax planning benefits. If you have questions about your family’s specific opportunities or would like help creating a private foundation, then please contact us. We’re happy to run over and discuss it with you!