IS A PRIVATE FOUNDATION RIGHT FOR YOU?

ISSUE

A private foundation is a non-profit, tax-exempt, organization funded and generally controlled by an individual or a family to contribute to charitable causes. The founder and his or her family, may make tax-deductible gifts to the foundation and there is no income tax on the income earned by the foundation.

In return for significant tax benefits, the foundation must distribute a certain minimum amount each year, generally 5%, to public charities. Most foundations serve as general-purpose endowment funds that the family may use to make their charitable contributions.

IMPLICATIONS

A private foundation is set up as a trust or non-profit organization according to the laws of the state in which the main office will be located. State requirements and specific language should be incorporated into the organization documentation in order to satisfy federal tax law. If both state and federal laws are not accurately followed, neither the organization nor any contributions to the foundation will be tax deductible.

Private foundations have been a vehicle of choice with which the wealthy have conducted their charitable activities and many are extremely well known - Ford Foundation and Rockefeller Foundation, to name a couple. There are also thousands of smaller, less well known, private foundations in existence today. These smaller private foundations are gaining momentum for both their ability to make distributions to charities of choice as well as the tax savings deduction for amounts donated to the foundation.

The basic activity of a private foundation consists of four elements:

1. Receiving donations (usually from the founder);

2. Managing its assets;

3. Complying with the relevant tax and other governmental requirements; and

4. Making contributions to charities in at least the minimum required amount each year.

Once a contribution is made to a private foundation, an immediate income tax deduction can be available. When a private foundation founder takes advantage of the maximum allowed deduction, the savings are significant.

SOLUTION

Key benefits to people who create private foundations are:

1. An immediate income tax deduction for amounts donated to the foundation;

2. Long-term build-up of foundation assets free of income tax;

3. Avoidance of gift and estate taxes for amounts donated to the foundation during the donor’s life and at the donor’s death;

4. Legal control of the foundation during the founder’s life;

5. Control in the family, essentially forever;

6. Ability to "buy time" by separating the timing of income tax charitable deductions from the actual distribution of grants to charities; and

7. Opportunity to share values and vision with children and grandchildren.

Private foundations can be used in combination with Charitable Remainder Trusts and Charitable Lead Trusts to generate powerful tax savings for clients. The trend in charitable giving is becoming increasingly focused and hands-on as donors take a more active role in

their philanthropy.

A private foundation is an ideal way for a donor involved in philanthropy to be sure their donations are having a significant impact on the causes they care about. The individual has control over the amounts and recipients of annual gifts; the only restriction is that the required minimum distributions must be made annually.

There are private foundation services that can manage nearly all aspects of a private foundation to alleviate the donor of the administrative demands.

Private foundations can be a great opportunity for individuals and families to create significant tax savings for themselves, while at the same time giving benefits to the community or tax-exempt charity of their choosing.