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• Private Foundations and Donor Advised FundsThey are not just for the rich and famous

Private Foundations and Donor Advised FundsThey are not just for the rich and famous

written on January 12, 2009 by Frank Fantozzi

Private Foundations and Donor Advised Funds
They are not just for the rich and famous

You may think that private foundations are only for families like the Rockefellers, Fords and Gateses - those who contribute millions of dollars to charity. But private foundations can be an effective strategy for creating a family legacy of giving. In fact, there is no official minimum and you may be able to effectively establish a foundation with an initial contribution as low as $250,000.

Give (on your own terms) and take

A private foundation is a tax-exempt entity that's typically structured as a not-for-profit trust or corporation and established to accept charitable contributions. It's private because it doesn't solicit public contributions.

One of its primary benefits is that it allows you to control your giving. As a member of the foundation's board of directors - which may also include family members, friends and trusted advisors - you manage the foundation's assets and direct grants to charities. You can also redirect the foundation's assets should your charitable goals change or if you want to discontinue your support of a particular organization. 

Like many other charitable giving vehicles, a private foundation offers tax advantages. For example, you can make a large contribution - and receive a large charitable deduction - in one year while distributions to the charities themselves are spread over a period of years to follow.

Contributions to a private foundation are deductible for federal income tax purposes. You can deduct cash contributions to a non-operating foundation (the most common type) up to 30% of your adjusted gross income (AGI). For noncash contributions, the limit typically is 20% of AGI. The deduction for any contribution in excess of AGI limits may be carried over and used for five years.

Know the drawbacks

Setting up a foundation can be costly - between $5,000 and $10,000. Annual administrative costs can be high too, depending on several factors, including the size of the foundation and whether you plan to hire staff to operate it.

Private foundations also are highly regulated. For example, though tax exempt, a foundation's net investment income is subject to an excise tax of 1% if all required distributions to charity have been made; otherwise 2%. And foundations that fail to make qualified distributions of at least 5% of their net assets each year must pay a 15% excise tax on the shortfall.

Avoid self-dealing

The biggest risk for private foundations, however, is the prohibition against self-dealing. This forbids transactions between a foundation and "disqualified persons," such as the founder and members of his or her family, officers, directors and certain employees, significant donors, and certain related entities.

The self-dealing rule is tricky because a person can violate it unknowingly and despite the best intentions. For example, if a disqualified person uses a foundation credit card for personal expenses and later reimburses the foundation for the expenses, this is considered a loan and a form of self-dealing - even if the person reimburses the full amount within a month of the transaction. A violation can result in significant penalties and even the loss of the foundation's tax-exempt status.

Yearly tax returns are required and Form 990-PF must be filed annually with the IRS and made available for public inspection upon request. State tax returns are also required in most states. Detailed reporting and allocation of expenditures is a must. 

Weigh the costs

Although complex rules and regulations govern private foundations, these entities also have their perks. A private foundation can allow you to direct or redirect assets to charities of your choice and take advantage of tax benefits.

Another Option-Donor Advised Fund

A donor-advised fund is a charitable giving vehicle administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual. A donor-advised fund offers the opportunity to create an easy-to-establish, low cost, flexible vehicle for charitable giving as an alternative to direct giving or creating a private foundation. Donors enjoy administrative convenience, cost savings and tax advantages by conducting their grant making through the fund.

Because the fund is housed in a public charity, donors receive the maximum tax deduction available, while avoiding excise taxes and other restrictions imposed on private foundations. Further, donors do not incur the cost of establishing and administering a private foundation, including staffing and legal fees. Since the maximum tax deduction is received by the donor at the time of the gift, the foundation administering the fund gains full control over the contribution, granting the donor advisory status. As such, they are not legally bound to the donor, but make grants to other public charities upon the donor's recommendation. Most foundations that offer donor advised funds will only make grants from these funds to other public charities, and will usually perform due diligence to verify the grantee's tax-exempt status.

 

For specific questions on this article or Investment Management, Life & Disability Insurance, Tax/Estate Planning, Philanthropy, and/or other financial topics, contact Frank Fantozzi at (440) 740-0130. You may also e-mail him at Frank@PlannedFinancial.com or visit http://www.plannedfinancial.com/

 

Securities offered through LPL Financial. Member FINRA/SIPC