The Shape of Tax to Come

A Tax & Estate Planning blog for 21st-century Texans

Private Foundations

Even in this down economy, many people want to give back to their communities. While giving to an established charity is the easiest course, some people want to be more involved in operations. As a result, they will establish their own private foundation so that they can direct the charitable operations. In this post, I’ll briefly discuss some of the benefits and burdens of private foundations.

Benefits of a Private Foundation

The biggest benefit of setting up a private foundation is that donors have more, if not complete, control of the charitable purpose if they remain involved in the foundation. If a donor wanted to give scholarships to children from a certain area and wanted to meet each applicant, it is possible to set up a private foundation to do that. Or, if the donor wanted to donate money, then hire someone else to ensure that the right people benefit, that can also be done.

A second benefit is that it allows donors to determine their level of recognition for their efforts. For example, if a donor named David Adams wanted to name his private foundation “The David Adams Children’s Education Foundation” to ensure that he received credit for his charitable efforts, then Mr. Adams could do that. Or, if he was not interested in the recognition, Mr. Adams could name his foundation “The Nueces County Educational Foundation.” In either case, Mr. Adams has the freedom to choose.

A third benefit of private foundations is that they provide a formal structure to administer a donor’s charitable giving. In effect, the foundation provides a strategic buffer between an affluent family and the many charities who seek contributions. This allows the family to direct all charitable requests to a single entity instead of dealing with each request as it comes in. If the family has a lot of requests, the time saved by establishing the private foundation may justify the expense.

While these are not all of the reasons, they encompass the big reason to set up a private foundation: greater control over the funds.

Burdens of a Private Foundation

While there are significant benefits to creating a private foundation, there are a lot of burdens that go along with it.

First, donations to a charitable foundation only qualify for the 30% charitable deduction instead of the 50% charitable deduction. This means that if a donor made a gift to a public charity, he would receive a greater charitable deduction on his taxes than he would if he made the same gift to a private foundation. So, if the charitable donation is part of the goal, a private foundation may not be the best answer.

Second, private foundations are subject to much tougher restrictions and penalties. Because Congress thinks that private foundations are more likely to abuse their tax-favored status, private foundations must comply with rules regarding self-dealing, excessive ownership of business interests, investments, income distribution requirements, and lobbying. This list is not exhaustive, but it gives you an idea of what to keep in mind when considering a private foundation.

Third, as implied above, a private foundation is neither a low-cost nor an easy option. Because of the costs involved in establishing and maintaining the tax-exempt status of a private foundation through various detailed tax filings, it may not be worth the cost in time and money for a donor.

Conclusion

Private foundations provide a lot of good in this country, and despite the burdens, many donors consider a foundation the best option for their charitable purposes. But before settling on a private foundation, a donor should consider whether the burdens will outweigh the benefits.

November 27, 2011 Posted by | Uncategorized | , | Leave a comment

   

%d bloggers like this: