United States: What Are The Benefits Of A Private Foundation?

Last Updated: August 2 2015
Article by Gina M. Giacone and Marilee J. Springer

The following is an excerpt from Ice Miller's Business Transition Strategies to Preserve Wealth Guide, which provides insights on a variety of topics to help ensure a smooth business transition.

1. A Donor Can Take a Charitable Deduction For Contributions To a Private Foundation.

One of the principal benefits of a private foundation is that a donor receives a charitable deduction for contributions that the donor makes to the foundation. A donor can give up to 30 percent of his or her federal adjusted gross income each year and claim a charitable deduction for the gift.

2. A Private Foundation Escapes Taxation.

Another important benefit of a private foundation is that it is not subject to a federal level income tax, and it is not taxed by most state authorities, either. As a result, a foundation's assets can grow and it can generate income that escapes federal and state taxes. A donor can make contributions to a foundation to reduce personal tax liability, and then allow these contributions to grow, tax-free, throughout his or her entire lifetime and beyond.

3. A Donor Can Maintain Control Over a Private Foundation's Funds and Activities.

A private foundation allows a donor to maintain control over the investment and use of the contributed funds while other alternatives may not. While the donor must give up ownership and control over the funds when he or she makes a contribution to a private foundation, the donor can continue to make decisions with respect to the investment and use of those funds by virtue of his or her role as a director and officer of the foundation.

A donor cannot maintain the same level of control over how contributions are used when the donor makes a gift to another charity. In fact, if a donor maintains control over a gift to another charity or provides "strings" on the gift which could cause the gift to be returned, the donor is not entitled to take a charitable deduction for the gift. In order to receive a charitable deduction for making a contribution to a charity, the donor must give up all control and ownership over the funds.

One type of charity that markets its programs is a community foundation. Community foundations market their services to potential donors on the grounds that the administrative fees charged by a community foundation are less than the fees associated with forming and maintaining a private foundation. A community foundation offers "donor advised funds," which allow a donor to make a contribution and receive a charitable deduction. The donor can then "suggest" or "recommend" possible uses or beneficiaries of those funds. However, it is very important to understand that, ultimately, the community foundation owns the funds and can choose where, how and when to invest and spend those funds. In fact, federal laws require that the donor give up all rights and ownership to funds that are contributed to a community foundation. In sum, a donor may choose a donor advised fund instead of a private foundation in order to decrease fees and administrative costs, but in so choosing, should understand that he or she no longer owns the funds or controls how such funds are invested or spent.

4. A Donor Can Benefit a Charity Simply Through the Donor's Association.

While a donor can benefit a charity simply through a donation, he or she can also benefit a charity by associating his or her name and image (either individually or through his or her association with a related commercial enterprise) with the cause represented by that charity. A private foundation provides an excellent opportunity for a donor to use the donor's public identity and association with the foundation's charitable purposes to generate contributions from others. Ultimately, this public visibility, and the leveraging of contributions it generates, may be much more valuable to the charitable causes being supported than simply the donor's own monetary contributions.

5. A Private Foundation Can Generate Goodwill For a Donor Within the Community.

Just as a private foundation may benefit from its association with a donor, so may the donor benefit from his or her association with the private foundation. A private foundation is generally named after the donor who established it. In this way, the goodwill produced by the private foundation in the community will also reflect on the donor, who is recognized as a community-minded individual who gives back to the community with time and economic resources. Thus, a private foundation provides an ideal vehicle for a donor to not only accomplish charitable objectives, but to do so in a public manner.

6. A Private Foundation Can Provide a Framework to Develop a Family's Charitable Interests.

A private foundation can introduce the next generation to charitable giving. While the senior generation may be better situated to fund current charitable gifts, a private foundation is a vehicle to engage the younger generations in the process. Regular meetings of the foundation's board, populated with several generations of the family, can provide a forum for discussing and defining a shared family vision regarding philanthropy. The family board can develop a family philanthropic mission statement and a giving strategy that fulfills its goals. Collectively deciding how the contributed funds will be managed and eventually passed on for charitable causes can be a valuable way for the generations to connect.

7. A Private Foundation Can Play an Important Role in Estate Tax Reduction.

If a donor makes a testamentary gift to a private foundation, the donor's estate can take a corresponding charitable deduction against the federal estate tax, thereby reducing the estate's overall tax burden. Under current federal law, this could result in savings of 40 cents in tax for every dollar contributed to the foundation. In addition, because the foundation's board can be family members, the donor might consider such a distribution as a transfer of "social capital" to the family and include the donation as part of an overall wealth transfer plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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