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:. Although you get the tax deduction up front, you can make your charitable deductions over time, enabling you to give thoughtfully. 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. 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.
The result will be a significant charitable legacy that your heirs may continue to control and pass down to future generations in perpetuity. Private foundations have latitude denied to other types of charitable vehicles.
For example, they can pay charitable expenses and hire staff—even family members. Travel expenses for site visits, board meetings, conferences, office supplies, and even our fees at Foundation Source qualify. You can name your private foundation after your family, the charitable purpose, or something generic that inspires you or enables you to maintain a low profile.
This tells us who will fund the foundation and where the foundation's investment account will reside. Contact Us Locations Toggle navigation. Haiti Earthquake — Resources for Disaster Relief. The Situation in Afghanistan: Learn More. Benefits of a Private Foundation. Overview As charitable entities, private foundations have proven to be incredibly successful engines of positive change.
While private foundations can be time-consuming and expensive, the thousands of individuals, families, and corporations who have established private foundations believe these sacrifices are worthwhile.
First, define your private foundation's purpose and the guidelines it will follow in making its grants. This definition will guide your organization's activities and is necessary to gain tax-exempt status. Next, decide whether to structure your foundation as a charitable trust or a nonprofit corporation. According to the Association of Small Foundations, a charitable trust can be easier to establish and operate, but may not provide the trustees with as much legal protection as a nonprofit corporation.
Nonprofit corporations have stricter operating requirements but are more common than charitable trusts since they limit personal liability and have more flexibility in how they may use their funds. If you organize as a trust, appoint trustees. If you organize as a corporation, follow the usual steps for establishing a corporation, including writing your articles of incorporation and bylaws, naming officers and directors, and filing with the state.
Regardless of how you decide to structure your private foundation, apply for an employer identification number EIN , The IRS requires that you have an EIN even if you don't anticipate hiring employees. This number will act as a tax identification number for your foundation as a Social Security number does for an individual. The next step is to file organizing documents with the IRS. Fill out Form , Application for Recognition of Exemption Under Section c 3 of the Internal Revenue Code, and prepare all of its required supporting documentation.
This form asks for the basic identifying information about your foundation and how it will be organized and operated. It also requires applicants to pay a fee. Finally, once the IRS approves your tax-exempt status, file any additional required paperwork to obtain tax-exempt status from your state. If you want to contribute to a good cause, the easiest way to do it is to write a check. So why do tens of thousands of people go to the trouble of starting up and operating private foundations?
For one, a foundation can consistently fund a select cause and provide cumulative benefits to the recipients over many years of donations. So, people starting a foundation are often seeking permanence, according to Exponent Philanthropy, formerly called the Association of Small Foundations. Some families start foundations to create a legacy, according to Exponent Philanthropy.
A foundation established in a loved one's name can honor that individual even after they have passed away. Establishing a foundation in a family name can also encourage family members to participate in a common—and often bonding—cause. Tax benefits are another reason for starting a private foundation. When organized as a c 3 , private foundations are tax exempt.
They can collect contributions of cash and appreciated property without paying taxes on those contributions, and the contributors can claim their donations as tax deductions with some restrictions. To qualify for the tax exemption , the foundation's purpose must be charitable, religious, educational, scientific, literary, testing for public safety, foster national or international amateur sports, or prevent cruelty to children or animals.
The foundation may assist the poor, advance education, or maintain a public building. The IRS defines three key differences between a public charity and a private foundation. Private foundations must:. Setting up your private foundation is a lot of work. So is maintaining it, which entails following IRS rules. Your foundation must avoid prohibited activities, which the IRS defines as:. Your foundation also must limit restricted activities, which the IRS defines as:. Donors may make tax-deductible donations to their own family foundation and still, as foundation trustees, remain in control of the investment and management of the funds as well the final charitable disposition of the gifts.
Sheltered Income Plus Control. Consistency in Giving. Under normal circumstances, foundations may accumulate and hold a portion of their funds. Foundations may also choose if and when to distribute such accumulated funds or the income earned on accumulations.
Thus, even though yearly contributions to the foundation may vary, giving levels are able to remain constant. Such consistency may be particularly helpful to grantees that rely on level funding from year to year.
Payment of Reasonable Compensation. Under normal circumstances, family members and others may receive reasonable compensation from the foundation in return for services rendered. Reimbursement of Travel and Other Expenses. Reasonable and direct costs of site visits and board meetings may be paid by the foundation to family members, employees, and trustees.
Double Capital Gains Tax Benefits. First, no capital gain is realized when appreciated property is donated to a foundation.
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