Do you have a cause that is close to your heart? Are you looking for a way to give back and make a real difference in the world? Private foundations are a great way for wealthy individuals to give back, impact causes they are passionate about and take advantage of unique financial benefits that the government offers to foundations and their donors. In this article we will cover the basics of Foundations, from their benefits, the different types of foundations and how they compare to other charitable entities. So if you’re ready to make a difference, keep reading!
What is a Private Foundation?
A private foundation is a nonprofit organization that is set up by private individuals, families, or businesses. Private foundations are distinct from public charities, which are funded by the public. Private foundations are often established to support a specific cause or charitable purpose. There are two different types of Private Foundations, Operating and Non-Operating Foundations.
Private Operating Foundation vs Private Non-Operating Foundation
Private Operating Foundations can create their own charitable programs that directly work and benefit the public, while non-operating foundations are limited to financially supporting other existing charitable organizations via grants and donations. Donors of operating foundations also can receive tax deductions for their donations up to 50 percent of their Adjusted Gross Income (AGI), while donors of non-operating foundations can deduct up to 30 percent of their AGI. However, there are additional qualifications and operating requirements for operating foundations such as an income test set forth by the Internal Revenue Service. While there are differences between Operating and Non-Operating Foundations, their benefits are very similar.
Tax Benefits of Private Foundations
There are many benefits of setting up a private foundation, many of which relate to taxes. Some of the most notable benefits of foundations include tax deductions, the flexibility to make grants to other nonprofits, the power to exercise control over how funds are used, the freedom to use the money for very specific causes that matter to you, and the ability to use some of the money to benefit your family and friends directly. Let’s take a closer look.
The first question most ask when considering a private foundations is the following: Are donations to private foundations tax deductible? The answer is simple: Yes! Donors who contribute money to private foundations can receive a deduction on their taxes for the full amount of their donation. This can be a major incentive for people with high taxable income or large unrealized gains.
To take a simple example, imagine a California family that earns $2 million this year in income. Without further planning, the family might owe around $1 million in federal and state taxes. But instead if they gift $500,000 into a private foundation, that tax bill would immediately shrink; that $500,000 becomes tax free, the family’s new taxable income is only $1.5 million, and their tax bill is now around $750,000. They have, in effect, sent $250,000 out of pocket but their foundation has an additional $500,000 to operate.
Another benefit of private foundations is one that might be obvious: You get to give money to causes you care about. The causes that a foundation focuses on can change over time, typically the foundation will give its Board of Directors the power to update its charitable priorities. These causes can range from the purely philanthropic (giving to public-minded organizations like the Red Cross or the Boys and Girls Club) to targets that have a more personal (giving to a university or museum to increase social clout and visibility, for instance).
For example, it is common to see a wealthy individual donating through a foundation to hospitals or universities, and for a building or program to be named after them in return. Another common use for foundation funds is to fund events like a gala to raise awareness and funds for a specific charity but also to create social clout for the families and individuals behind these events.
3. Control Over How Funds Are Used
Perhaps one of the biggest advantages of giving through a private foundation is that donors retain complete control over how the funds are used. They can decide which causes to support and how much money to give. For example, the foundation can choose to continuously change which causes it financially supports or even establish new, separate charitable programs itself as the family’s priorities change. This level of control is not possible with public charities, which are controlled by management, not the donors.
4. Involve Family and Friends
It is fairly common (and well within the rules) for foundations to employ family and friends — and to pay them reasonable salaries — to manage operations. This arrangement has many benefits: Most critically, you can ensure that those who know you best are in charge of implementing your philanthropic goals; you can give your children and other family members the opportunity to see and drive the impact of significant charitable giving; and your family can earn some of your money back in the process.
No doubt there are some drawbacks to giving through a private foundation. These include the costs of set up and maintenance, as well as the complex filing requirements, which Valur takes care of.
Private Foundation Contribution Limits
There is no limit to how much you can give to your private foundation. There is, however, a cap on how much of your contribution can be deducted from your income. Contributions to private operating foundations are up to 50% deductible, or up to 30% of the donor’s adjusted gross income (AGI) depending on the structure of the foundation.
Comparison to Public Foundations
There are a few key differences between private and public foundations (or public charities), the most significant being the amount of control the founder has over the private foundation. Examples of Private Foundations are the Bill & Melinda Gates Foundation while some examples of Public Foundations are Churches, Universities and non-profit hospitals.
- The main difference between private and public foundations is the level of control the founder has over the private foundation. Donors to public foundations have almost no control over how funds are distributed or how the organization is run. However, the founder or donor of private foundations have significant control over these things. This gives private foundations more flexibility in how they operate and distribute funds.
- Public foundations are typically funded by donations from the public, while private foundations are funded by donations from a small group of individuals or organizations.
- Public foundations must comply with certain IRS filing requirements, such as filing an annual return and paying taxes on any income or investments. Private foundations are not required to file an annual return, but they must still pay taxes on any income or investments.
Are Private Foundations different from Donor Advised Funds?
Charitably inclined individuals are often looking to get creative, and we’re often asked about other avenues for giving, including donor advised funds (DAFs) and how to DAFs compare to private foundations?
Both are types of charitable organizations, and your donations to both will be at least partially deductible. Both allow you to dole your money out to charitable causes over time. But these structures differ in a few key ways.
- Charitable Giving: Foundations have much more flexibility in choosing how they use their assets for charitable benefits, as they can create their own charitable programs or donate to existing programs, while DAFs have to give to existing programs
- Requirements: Private foundations have more overhead as they are required to file an annual tax return with the IRS, while donor advised funds are not. Second, a private foundation must have a board of directors that oversees its operations, while donor advised funds do not.
- Operating: Foundations have paid staff, often including family members, to manage the foundation and the philanthropic giving while while a DAF cannot.
What are some famous Private Foundations?
Some examples of famous private foundations and their missions include the following:
- The Bill & Melinda Gates Foundation. This foundation focuses on global health and development, as well as education. It has raised over $41 billion since its inception.
- The Rockefeller Foundation. This private foundation is focused on supporting innovative solutions to global challenges in areas like health, agriculture, and education.
- The Ford Foundation. This foundation focuses on a variety of causes, including education, the environment and civil rights. It has raised over $13 billion since its inception.
Private foundations bring with them a variety of tax benefits but also give the creators significant flexibility in distributing those funds and impacting the world. However, there are multiple Private Foundation options as well as other charitable entity options that offer individuals venues for charitable giving alongside financial benefits. Hopefully this article alongside our articles on each of those structures helps you make a decision. Our goal at Valur is to make it seamless to understand these options and setup and take care of the administration for each of these options.
We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.