What is a private foundation? A private foundation is a legal entity set up by an individual, family, or group of individuals, for a specific purpose, such as philanthropy. Private foundations can be organized either as a nonprofit corporation or as a charitable trust. You can appoint yourself, as well as family members, friends, or professionals, to sit on the foundation’s governing board.
What Are Some Reasons to Consider a Private Foundation?
Family foundations are one of the most common forms of private foundations. Families sometimes use a foundation as an opportunity for family members to work toward common goals or as a way to teach the value of charitable giving to future generations. It is also a perfect way to continue giving to those favorite charities for many years.
What Are Some Specific Advantages of Private Foundations?
Here are a few of the advantages offered by private foundations:
- Since private foundations are charitable organizations, they’re exempt from income tax on the income. However, a 1.39% excise tax is applied on net investment income.
- Gifts made to establish a new foundation or grow an existing one offer certain tax advantages. Income or estate tax deductions are available under the law and are a great way to establish a family legacy of charitable giving. Gifts can be made during life and or upon death.
How Does a Private Foundation Work?
The most common type of private foundation is the private endowed foundation. The foundation’s financial assets create a principal (endowment) that is invested. Income from the endowment is then paid out annually to charity. Generally, the endowment is not spent but rather the investment income is paid out. With good investment, the endowment can increase, thus ensuring the foundation’s growth and continued ability to meet future community needs. By law, private foundations are required to pay out annual grants and other qualifying distributions that total at least 5% of the average fair market value of the assets during the year.
What Else Should You Know About Private Foundations?
Most of the private foundations that are filed with the IRS have less than a million dollars in assets and still many have less than ten million. It is recommended that at a minimum of $500,000 to $1,000,000 to set up a private foundation.
Unlike charitable organizations that are publicly supported, private foundations don’t typically solicit funds from the general public hence the title private foundations. Although the rules for establishing and maintaining a private foundation are complex, there are great advantages to these types of organizations.
How Can Anderson ZurMuehlen Assist?
We bring a depth of experience and knowledge in the private foundation area. Things we can assist with are:
- Help setting up the private foundation
- Preparing the annual tax return (Form 990-PF)
Ongoing administration can include receiving and summarizing charitable distribution requests and check preparation for those approved requests. We have the resources and expertise to answer ongoing questions. Many private foundations provide funds to so many charities in our communities for a variety of personal causes and to local schools for scholarships. Let us help you set up your family legacy of giving.
This article was written by Pam Guschausky, CPA and Shareholder in our Great Falls office.