Private Foundation

A private foundation is an independent charitable corporation or trust established as a tax-exempt entity under Section 501(c)(3) of the Internal Revenue Code. Private foundations make charitable distributions throughout a taxable year and are funded entirely through contributions from an individual, family, or corporate donors.

Unlike public charities, private foundations are not required to be governed by a diversified board of directors. Donors who establish private foundations are able to exercise greater control over the operation and grant-making activities of the foundation compared to other charitable initiatives.

The private foundation provides flexibility to the donor:

  • In making grants to other charitable organizations.
  • In obtaining current income tax deductions for direct contributions to the foundation.
  • In transferring tax deductions for gifts of income interests in charitable lead trusts or remainder interests in charitable remainder trusts.

Benefits of a Private Foundation

Private foundations allow a charitable income tax deduction and possible transfer tax deductions for contributions made to the foundation, which include:

  • An income tax deduction of up to 30% of the donor’s adjusted gross income for any amount contributed.
  • No capital gains tax on highly appreciated assets donated to the foundation, generally deductible up to 20% of the donor’s adjusted gross income.
  • No federal or state estate taxes on assets donated to the foundation.

Note that private foundations are required to pay a nominal excise tax of 1.39% on their net investment income.

Because private foundations are independent legal entities controlled by their donors, donors retain control over who manages the money in the foundation. The donors have final say on all operations, including how assets are invested and spent, which charities and organizations are supported, and who is involved in the foundation’s governance.

Private foundations are excellent planning tools for those donors who are interested in establishing a legacy of giving. Heirs and loved ones can be part of the process of distributing grants to charity, and the fund can last beyond a single lifetime.

Who Is a Private Foundation for?

A private foundation works well for donors who wish to receive a current income tax deduction, and who may wish to use the foundation as the charitable recipient of distributions from a charitable remainder trust or charitable lead trust. A private foundation requires a donor who is interested in being actively involved in the running of the foundation, but is not concerned about the restrictions from the IRS private foundation rules.

Our questionnaire can help you discover if a private foundation is right for you. Click the button below to fill out the questionnaire, or keep reading for more helpful information.

Take the Find Your Fit Questionnaire

How Does a Private Foundation Work?

If a private foundation is right for you, then Ren can get you started. We’ll help you determine if your goals are suited towards an operating or non-operating private foundation.

Operating foundations are directly involved in operating a charitable project or enterprise such as a museum, zoo, or library in a continuing and sustaining manner. Rather than making grants to other organizations, they spend the majority portion of their investment income on their own charitable projects.

Non-operating foundations don’t usually run their own programs, but instead give back by making grants to public charities, individuals, and organizations. Non-operating foundations are required to make an annual distribution equal to roughly 5% of their prior year’s average net investment assets. Distributions that count toward this requirement include grants to charities, certain related expenses, and, with the exception of investment expenses, necessary and reasonable administrative costs.

While private foundations offer a large degree of control for their donors, they require heavy involvement in the foundation’s granting strategy. As a donor, you will need to help operate the foundation, including hiring staff and investment managers, managing grantmaking, and fulfilling all reporting requirements.

Ren can help you initiate the process of establishing the foundation, file for tax-exempt status, make the initial contribution of assets and manage other required administrative documents.

Private Foundation Downloadable Resources

Quick Guide

Reference Guide for Private Foundation.

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Donor Story

Create a scholarship program through a private foundation.

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