Thoughtful estate planning for everything you own and everyone you love.

Jerry O'Brien – Orange County, CA

Private Foundation

What is a Private Foundation?
Private Foundation receives most of its funds from a single source, such as an individual, family or business entity. The Private Foundation’s directors make grants to registered charities.
Who should consider the use of a Private Foundation?
In order to justify setting up a Private Foundation you need to be able to generate a certain level of sustainable income which can be used to make annual grants to registered charities. Some financial planners suggest a minimum of $100,000. The interest obtained from these assets should justify the cost of the time and expense of managing the distribution of grants to registered charities designated by the Private Foundation.
Why are Private Foundations formed?
There are many valid reasons for creating a Private Foundation. It may be intended to perpetuate a gift or to create a long-lasting entity devoted to charitable giving. Many private foundations are the dynamic legacy of a special individual, allowing for the long lasting recognition of an individual that often reflects his or her values. Individuals setting up a Private Foundation are often interested in adopting an orphan cause, or supplementing funding to an area of a cause that is underfunded. A Private Foundation selectively gives to registered charities that further its mission. It creates a screen between the donors and those seeking grants, allowing requests to be judged in an orderly and objective manner.
Is forming a Private Foundation a lot of work?
A Private Foundation does take a significant amount of time to set up and manage. However, they do serve as a purpose. It is a mechanism for bringing family members together. The foundation can serve as a reason for the family to come together on a regular basis in order distribute grants to registered charities. Because of the complexity of the rules governing the administration of a Private Foundation, the trustees or directors need to be careful in their decisions with regard to its operation. During the early years of a Private Foundation a good deal of time will need to be focused on learning the rules and implementing them. During that period of time in which leadership is transferring from the initial to the second generation, the transitional teaching and learning period will also require time and effort on the part of all active members.
Is forming a Private Foundation expensive?
It costs a fair amount of money to set up a Private Foundation. This can involve appraiser fees, CPA fees, attorney fees, financial advisor fees, travel, lodging and even psychologist fees. If you believe the costs outway the benefits the trust will provide, then they are.
How is a Private Foundation taxed?
A Private Foundation is a 501(c)(3) organization (i.e., a charitable organization) that does not qualify under the tax code as a “Public Charity.” Private foundations are subject to certain taxes that do not apply to public charities. The tax code limits the deductibility of gifts to Private Foundations in ways that do not apply to public charities. When Private Foundations make operational mistakes, it can become subject to excise taxes. These mistakes include:

Can the directors of a Private Foundation be compensated?
Yes. They can be compensated, under a limited set of circumstances and if they pass a two prong test:

  • The personal services provided by the director must be reasonable and necessary to carry out the Foundation’s tax exempt purpose.
  • The compensation must be reasonable.

Private Foundation
Every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term (referred to in section 509(a)). In addition, certain nonexempt charitable trusts are also treated as private foundations. Organizations that fall into the excluded categories are institutions such as hospitals or universities and those that generally have broad public support or actively function in a supporting relationship to such organizations. Even if an organization falls within one of the categories excluded from the definition of private foundation, it will be presumed to be a private foundation, with some exceptions, unless it gives timely notice to the IRS that it is not a private foundation.
Excess Business Holdings
Basic Rule: a private foundation may not own a controlling interest in a for-profit company.
Real property, tangible & intangible assets.
Jeopardizing Investments
Basic Rule: private foundations must not make any investments that jeopardize the carrying out of their exempt purposes.
The use of foundation assets to enter into any financial transaction between the foundation and a disqualified person.
Director’s Note
The Council on Foundations has excellent brief information on Private Foundations:Legal Basics: What Every Foundation Leader Should Know