Foundations: Not Just for Rockefellers Anymore

The Private Foundation has long been established as one of the most highly regarded cornerstones of American Philanthropy. From days of old, foundations such as the Rockefeller Foundation, the Carnegie Foundation, and the Pew Charitable Trust have shaped American life in invaluable ways. Modern-day incarnations include the J. Paul Getty Trust, the Bill and Melinda Gates Foundation, and the David and Lucille Packard Foundation.

For decades, such foundations have played an indispensable role in society: building universities, hospitals, and museums; constructing and funding facilities for the arts, sciences and humanities; and sponsoring invaluable research into public opinion, and even the research and treatment of diseases that have plagued mankind from time immemorial.

Fortunately, however, Private Foundations are no longer the exclusive domains of the Rockefellers and the Gateses of the world.

Today, a modern generation of philanthropists is creating foundations with initial contributions as small as $500,000 - not exactly small potatoes, but a far cry from the $24 billion endowment of the Gates Foundation.

Who Creates Foundations?

While it is impossible to come up with a one-size-fits-all generalization, certain characteristics are common to many, if not most, foundation creators.

They include:

(1) A desire to use their time, skills and financial resources to benefit worthy causes that are near and dear to their heart.

(2) A desire to involve not only their attorney and accountants in the giving process, but to include their children, children-in-law, or even their grand-children in the philanthropic process.

(3) A desire to see real and actual change take place in the areas in which they have dedicated their resources. They rarely are content to simply "cut a check", but take an active involvement in seeing that the organizations they fund are achieving measurable results with the money that has been given them.

(4) A desire to see that such worthy causes and organizations are not "left in the lurch" by economic downturns or the unpredictability of the various markets. Donations are often made in order to sustain their beneficiaries through the challenges of tomorrow as well as today.

Technical Requirements of Foundations

Interestingly enough, Section 509 of the Internal Revenue Code does not provide us with a precise definition of what constitutes a Private Foundation. Rather, Private Foundation is the "default" status given to a wide range of charitable organizations that fail to prove that they are Publicly Supported Charities.

For our purposes, however, Private Foundations are entities that are intentionally designed (rather than by default) by their creators to provide financial and other support to qualifying Charitable Organizations. That is, rather than doing the direct work of charity themselves, Private Foundations are traditionally set up to support those groups and organizations who actually are doing the work.

Due to a perceived history of abusive (i.e. not truly charitable) uses of Private Foundations, Congress and the Internal Revenue Service have seen fit to saddle Private Foundations with a host of administrative, financial, and regulatory requirements. Included in these are annual reporting requirements, annual excise taxes, minimum annual distribution requirements, prohibitions and penalties on actions the IRS deems "self dealing", reduced charitable income tax deductions (versus publicly supported charities), and extensive administrative obligations to ensure that donations are made and used for purposes that are permitted by law.

Conclusion

Due to the highly regulated and administratively burdensome environment in which most Private Foundations are required to operate, they are definitely not for everyone.

For the Donor who is simply looking to make a one-time, relatively quick and easy contribution to a single charity, a Private Foundation is probably not the best vehicle to accomplish this objective. Similarly, those who are not particularly persuaded by charitable considerations, but are motivated primarily by perceived tax benefits, should not consider a Private Foundation.

From a financial perspective, creating a stand-alone private foundation rarely make sense unless a Donor is contemplating a sizable contribution, such as $500,000 and up.

On the other hand, those Donors who are passionate about providing long-term support to valued causes and organizations, and who may wish to involve family members in the Philanthropy process, a Private Foundation may be an invaluable tool to achieve their stated goals and desires.

As always, we welcome the opportunity to speak with you in person regarding whether or not such charitable giving techniques would be of value to you and your family.