To make a positive impact on society, support charitable missions, and leave a lasting legacy for future generations, consider starting a private family foundation.
A private family foundation is established and funded by a family with the purpose of supporting philanthropic causes long-term. The family maintains control over charitable activities and grant-making decisions by serving as trustees or directors of the foundation.
Certain tax exemptions and flexibility with giving are among the reasons why many people seek out this type of charitable vehicle. Keep reading to learn more about whether a private family foundation is right for you.
What is a private family foundation?
This type of private foundation is funded entirely by a singular family and set up as its own legal entity, similar to a nonprofit corporation or trust. The foundation’s operations and decisions are overseen by a board of trustees or directors, often members of the family who created it.
A tax-exempt status is granted by the federal government, which means private family foundations are not subject to taxes on investment income and donations.
Examples of private family foundations
You have likely heard of these well-known family foundations that make significant contributions to a range of charitable organizations. The following are examples of private family foundations on the largest scale:
- The Bill & Melinda Gates Foundation has spent $53.8 billion since 2000 on improving the well-being of children around the world, focusing on poverty alleviation, education, and more. A list of investments is publicly shared each year, along with a financial statement. CEO Mark Suzman leads the foundation under the direction of co-chairs Bill Gates and Melinda French Gates and a board of trustees.
- Goals of the Walton Family Foundation are three-fold: Empower lifelong learning opportunities by providing a strong K-12 education; protecting bodies of water and the communities they support; and advancing the Waltons’ home region of Northwest Arkansas and the Arkansas-Mississippi Delta. Several generations of the descendents of founders Sam and Helen Walton, as well as their spouses, lead the foundation. It awarded $749.5 million in grants in 2020.
- The Carnegie Corporation of New York has been in existence since 1911, when Andrew Carnegie endowed the bulk of his $35 million fortune. As of Sept. 2021, the endowment was valued at $4.7 billion. Philanthropic support focuses on education, democracy, international peace and security, and higher education/research in Africa.
Why establish a private family foundation?
The reasons for establishing a private foundation are as unique as the families they represent. Explore these common motivations, as well as circumstances under which private family foundations come to be:
- Starting a philanthropic legacy. A family is able to preserve its commitment to giving back to the community and leaving a lasting impact via foundation work.
- Tax advantages. Up to 30% of the donor’s adjusted gross income can be deducted for any amount contributed. There is no capital gains tax on highly appreciated assets donated to the foundation, as well as no federal or state estate taxes on those assets. Private foundations must pay a 1.39% excise tax on their net investment income.
- Visibility. Widespread attention on a foundation, and subsequently the charitable organizations it supports, is an additional way to recruit support.
How is a private family foundation funded?
A private family foundation is funded entirely through contributions from an individual, family, or corporate donors, including inherited assets, proceeds from varying types of sales, and more.
A donor must first work with an attorney to create a tax-exempt entity; a process that includes filing legal forms and drafting organizational documents.
Donors are then in charge of choosing the governing body that oversees operations. This often involves family members or other trusted individuals.
The foundation makes grants to charitable organizations every year based on previously established policies. These grants support various charitable initiatives and projects aligned with the foundation’s mission and values.
Pros and cons of private family foundations
Starting a private family foundation offers the advantage of having full control over philanthropic activities and creating a lasting legacy for generations. However, it also comes with the responsibility of managing administrative tasks, compliance with legal regulations, and potential costs. Review these pros and cons while deciding on your investment:
|Philanthropic impact||Costs and administrative burden|
|Control and flexibility||Potential familial conflict|
|Family legacy and engagement||Lack of privacy due to some public disclosure requirements|
|Tax benefits||Shift in mission over time|
The 5% rule in private family foundations
Private family foundations have a legal obligation to pay out at least 5% of assets annually in the form of grants and charitable activities. This is known as the 5% rule.
Comparing private family foundations and DAFs
Donor-advised funds are a more popular charitable giving option. Money is deposited into an account that can grow in value and be granted to charities over time. Donors give directly to a sponsoring charity that maintains the DAF and be eligible for an immediate tax deduction. They also gain advisory privileges to recommend grants and how money is invested.
|Funded by a family or individual||Contributions come from many individuals|
|Tax deduction can happen before donation is used||Immediately tax deductible upon giving|
|Family has direct control over the entire foundation||Donors provide input on which charitable organizations receive grants from the DAF account|
|At least 5% of assets must be used annually||No annual grant requirement|
Ren’s giving experts specialize in creating and executing these giving vehicles. Get in touch with a member of our team to learn more about passing off the administrative duties that come with giving at scale, so you can focus on the work you’re most passionate about.
We understand that you will have questions along the way. That’s why we created this downloadable guide, “12 Questions to Ask Before Setting Up a Donor-Advised Fund,” to get you started.