ISSUE

A private foundation is a non-profit, tax-exempt, organization funded and generally controlled by an individual or a family to contribute to charitable causes. The founder and his or her family, may make tax-deductible gifts to the foundation and there is no income tax on the income earned by the foundation.

In return for significant tax benefits, the foundation must distribute a certain minimum amount each year, generally 5%, to public charities. Most foundations serve as general-purpose endowment funds that the family may use to make their charitable contributions.

IMPLICATIONS

A private foundation is set up as a trust or non-profit organization according to the laws of the state in which the main office will be located. State requirements and specific language should be incorporated into the organization documentation in order to satisfy federal tax law. If both state and federal laws are not accurately followed, neither the organization nor any contributions to the foundation will be tax deductible.

Private foundations have been a vehicle of choice with which the wealthy have conducted their charitable activities and many are extremely well known – Ford Foundation and Rockefeller Foundation, to name a couple. There are also thousands of smaller, less well known, private foundations in existence today. These smaller private foundations are gaining momentum for both their ability to make distributions to charities of choice as well as the tax savings deduction for amounts donated to the foundation.

The basic activity of a private foundation consists of four elements:

1. Receiving donations (usually from the founder);

2. Managing its assets;

3. Complying with the relevant tax and other governmental requirements; and

4. Making contributions to charities in at least the minimum required amount each year.

Once a contribution is made to a private foundation, an immediate income tax deduction can be available. When a private foundation founder takes advantage of the maximum allowed deduction, the savings are significant.