People give money and property to charity for a number of reasons. Among the most common are the desire to help society by funding a worthy cause and to enjoy the income and estate tax benefits derived from charitable giving.
Despite these benefits, one concern donors may have is the loss of control over money and property gifted to a charity. To meet this concern, a donor can create a private foundation that will distribute its donations and income to charitable causes favored by the donor.
What is a Private Foundation?
A private foundation is a charitable organization created and funded by a donor-during life or at death-that’s designed to achieve one or more specific charitable purposes. Overall management of the foundation is provided by a board of directors or trustees often selected by the donor. The directors or trustees can be paid reasonable compensation for their services.
Technically, tax law describes a private foundation as a charitable organization exempt from income tax under IRS Sec. 501 (c) (3) other than the following:
- Organizations that generally receive a substantial part of their support from the general public or from the government.
- Religious organizations.
- Education institutions with regular learning facilities, a student body, and a specific curriculum.
- Organizations devoted to promoting public safety.
In addition, a private foundation doesn’t include any charitable organization which:
- Receives more than one-third of its support from the sum total of gifts, grants, contributions, membership fees, and receipts from a permissible business or activity.
- Receives one-third or less of its support each year from the sum of gross investment income and excess unrelated business income.
Choice of Entity
A private foundation can be structured as either a corporation or a trust. There are advantages to each type of arrangement.
- A corporation may be more flexible than a trust to meet changing circumstances. Corporations operate through a board of directors and officers who can easily be hired or replaced.
- Trustees may be held to a higher degree of responsibility than corporate officers with respect to liability.
- It may be easier to establish a trust, an important point if a donor wants to realize a tax deduction before a tax year closes.
- The filing requirements for a trust may be simpler than for a corporation, which could reduce administrative costs.
Be sure to consult with your legal and tax advisors to discuss this and other charitable giving concepts. AA!