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Tax Planning Reasons to Potentially Establish a Private Foundation

May 26, 2019

A private foundation is an excellent vehicle for a family to get an immediate tax deduction for charitable giving—without requiring them to decide right away which organizations or causes are the beneficiaries.

What Is a Private Foundation?

A foundation is considered “private” when it receives less than one-third of its support from the general public. Private foundations must distribute a minimum amount by the taxable year-end after the donation year. In addition, they must give at least 5% of the organization’s average fair market value of assets held for investment annually toward the foundation's charitable purpose. (Note: Any funds used to further the exempt purpose of the private foundation qualify toward the annual giving requirement.) In addition to giving to other qualified charitable organizations, private foundations allow for the contribution of funds directly to individuals in need, using dollars previously deducted for tax purposes by the donors.

Two Benefits of Utilizing a Private Foundation

Having the right tools and training plan can improve training effectiveness for that 5K race. Similarly, a private foundation can create monetary success when used:

  1. As an effective tax planning tool. The donations made to a private foundation are tax-deductible at the contribution date. However, the private foundation has an entire year after its tax year-end to give part of that money to qualified charities or spend it on the organization’s exempt purpose. This situation creates a very effective tax planning tool. For example, taxpayers can wait until December to determine how much to give based on their tax situations, and they then have another year to choose the beneficiary organizations.
  2. In perpetuity: A private foundation can be set up in perpetuity and serve as a vehicle for giving to future family generations. If invested wisely, the funds can grow over time and generate investment income so that the gifts surpass the actual funding. Plus, it leaves a legacy that can allow a family name to endure far beyond one taxpayer’s life.

Steps for Creating a Private Foundation and Ongoing Requirements

Private foundations are organized in the same manner as other charitable organizations. The general steps are:

  • Draft a mission statement.
  • Incorporate the organization in its state of domicile
  • Obtain an Employer Identification Number.
  • File Form 1023 to establish the organization’s tax-exempt status with the IRS.

Once created, a private foundation is subject to continuous requirements. Specifically, the foundation directors are responsible for performing calculations of the minimum annual giving requirements and ensuring timely donations. Penalties can reach 100% of the contributions requirement not met—which can cause upheaval in the board and in the family.

CRI’s Nonprofit Team

Private foundations can be a significant resource to expand a family’s philanthropic goals while also serving as a vehicle offering substantial tax planning benefits. If you have questions about your family’s specific opportunities or would like help creating a private foundation, then please contact us.

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