Technical Requirements of Private Foundations

We have discussed how Private Foundations have served as the cornerstone of American Philanthropy for generations.

We also have taken a look at the characteristics of those Who Set Up Private Foundations.

Now, let’s take a look at the legal and technical requirements of setting up and managing a Private Foundation.

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 Organizations.

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.

In other words, 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, such as:

  • 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), as well as
  • Extensive administrative obligations to ensure that donations are made and used for purposes that are permitted by law

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.  A Bequest or Outright Gift would serve those objectives better.

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 $100,000 and up.

A Donor Advised Fund may serve many of the same objectives as a Private Foundation, without many of the administrative requirements.

On the other hand, for 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.

Please Contact Our Firm to set up an appointment.