Private Foundations

Description

A nonprofit organization you or your family establishes, typically through a substantial initial gift. Grant to public or private charities.

Key characteristics

  • Potential immediate tax deduction, up to 30% of adjusted gross income for cash gifts and 20% for appreciated assets
  • Avoids capital gains tax for gifts of long-term appreciated securities
  • Accepts many types of assets
  • Full control over investment management
  • Full control over granting to charities
  • Must distribute at least 5% of assets each year
  • Requires legal setup and ongoing maintenance
  • Must file tax returns, with an excise tax on investment income
  • Family members may be employed or serve as board members

Details

A private foundation is a form of tax-exempt organization, which must be organized and operated exclusively for charitable purposes. The charitable activities of a private foundation generally concentrate on receiving charitable contributions, managing its charitable assets, and making grants to other charitable organizations to support its charitable activities.

Another form of private foundation, a private operating foundation, which we are not focusing on here, engages in charitable functions directly. Generally, contributions to a foundation may be in cash, mutual fund shares, bonds, stocks, or real estate.

Foundations are overseen by directors and trustees, generally called the "board" — often family members, friends, or advisors. This board is responsible for determining, with the help of professional advisors, the affairs of the foundation, including how foundation assets are invested, where and when grants are distributed, and how large these grants should be.

The most successful foundations are founded with a clear charitable purpose. Typically, this is expressed in a brief two to three sentence mission statement created by the role of the mission statement is to create a clear sense of direction for the foundation, to focus grantmaking activities and improve the overall impact of grants, and to foster a shared understanding of the foundation's purpose.

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