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Giving to Charity
Private Foundations
By Dwight Wanken
Registered Principal, Raymond James Financial Services, Inc.
The Kennedys, the Fords, Rockefellers, Gettys and lots of other "old money, carriage trade" families have them. Now you can too. Have what? A private foundation. Private foundations are charitable entities created by an individual or family. They are private because they do not solicit contributions from the public. There are two general types of family foundations: operating and non-operating. Operating foundations carry on specific charitable work (e.g., the Jones Home for Battered Children). Most people select non-operating foundations which make cash grants to individuals and organizations as the means of carrying out its charitable purpose.
Private foundations can have profound estate and income tax benefits and therefore have become useful tools within more elaborate financial plans. However, the primary motivation of those establishing a private foundation is to achieve some charitable purpose. The use of a private foundation allows a family to create a legacy of giving that could last into perpetuity. A private foundation can help create a tradition of giving and public service among many generations of a family. The founder can also set the tone and direction for the foundation through the instrument that creates it.
Private foundations may be organized either as trusts or corporations, although the corporate form is currently the more popular. They are run by a board of trustees (trusts) or a board of directors (corporations). They must exist for a specific charitable purpose. That purpose, incorporated into the documents that create the foundation, must be dedicated to religious, scientific, literary, educational or charitable purposes. The founder may be very explicit or very general in stating the purpose of the foundation.
Contributions to private foundations are deductible for federal income tax purposes. Cash contributions are limited to 30 percent of adjusted gross income (AGI). Gifts of appreciated assets to private foundations are limited to the donor's cost basis (tax treatment has varied on this issue) and 20 percent of adjusted gross income. Any contribution in excess of the AGI limits may be carried over and used for five years.
A variety of special excise taxes apply to private foundations. First, to avoid one excise tax, the foundation must make grants of at least 5% of average assets each year. They must also pay a 1% to 2% excise tax on investment income. They are prohibited from self-dealing (e.g., transactions with donors and board members, etc.) except under limited circumstances. Foundations may not own a 20% or more interest in a business. Grants for certain purposes (political, scholarship, and others) are restricted or prohibited. Expenditures for non-charitable purposes (i.e. operating expenses) must be within guidelines. Finally, the foundation must file an annual tax return. While private foundations can provide many benefits, the area is also fraught with potential complexity.
Financial and estate planning involve more than mere tax considerations. Consulting with a financial planner, as well as allied legal and tax professionals, is desirable for those wanting to incorporate charitable giving into their financial plans.
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