What Are the Benefits of a Private Family Foundation?

A private foundation is an effective way to engage in philanthropic work while also enjoying certain income tax and estate tax benefits. Private foundations are funded and established by a corporation, individual, or family to support or engage in charitable activities. Most private foundations are administered by a board of directors or trustees, who oversee the receiving of charitable donations, the management of the foundation’s assets, and the dispersal of funds to projects or other charities. Private foundations are one of two types of 501(c)(3) organizations, the other being a public charity.

There are two main types of private foundations—operating foundations and non-operating foundations. Operating foundations are directly involved in the operation of a charitable or community program, such as a food bank, medical clinic, or museum. These foundations use their assets to support their own programs (although they also have the option to give grants to other charities as well). Non-operating foundations, on the other hand, exist solely to provide grants to other operating charities. They are technically allowed to run their own programs, but this is typically not their primary purpose.

Private Family Foundations

Although private family foundations are technically a differentiated subset of private foundations, there are no additional rules or regulations that apply to them. In short, a private family foundation is simply a private foundation that is created by a family. It may also be managed by the family, although this is not a requirement. Approximately half of all private foundations in the US are private family foundations. Like all private foundations, they must disperse a minimum of 5 percent of assets each year in the form of grants or self-operated programs. Grants provided by private foundations must be viewable by the public in order to maintain transparency and enable other charities to see what types of programs the foundation supports for planning and grant-writing purposes.

Private family foundations can be funded in a one-time lump sum or on an ongoing basis, using a variety of financial vehicles, such as cash, stocks, real estate, securities, and other assets. Foundations may create their own governance systems that describe the roles of various board members or trustees, but these systems must strictly adhere to restrictions and regulations enforced by the IRS. Setting up a private family foundation can be complicated and time-intensive, so it is often best to engage the services of professional attorneys and CPAs experienced in the process.

Benefits of Private Family Foundations

In addition to supporting charitable works and community-building programs, private family foundations come with a number of tax benefits. Immediate tax deductions are available for cash gifts of up to 30 percent of adjusted gross income and up to 20 percent of long-term appreciated publicly traded assets. Gift giving through private family foundations also makes it possible to reduce capital gains taxes on long-term appreciated securities and to reduce estate tax liabilities. Private foundations can also accept a variety of assets as donations and provide tax deductions to outside donors.

That said, the tax benefits provided to and by private family foundations are often less advantageous than those enjoyed and provided by public charities, and particularly donor-advised funds.

Donor Advised Funds Versus Private Family Foundations

A donor-advised fund is essentially an account funded by an individual, family, or corporation for the express purpose of supporting specific charities. However, this fund is managed by a public charity. These funds enjoy tax-free growth on investments, and funders can suggest grants to any charity declared eligible by the IRS. The fund can bear the name of the individual or family that created it (or any other name they desire) and, unlike private family foundations, has no required annual disbursement.

Donor-advised funds enjoy several increased tax advantages, and for that reason are preferred over private family foundations by some people. Rather than being limited to 30 percent of gross adjusted income for gifts of cash and 20 percent for publicly traded assets, donor-advised funds provide tax benefits for 60 percent of gross adjusted income for cash gifts and 30 percent for gifts that include publicly traded assets. In addition, gifts of non-publicly traded assets to a private foundation are only deductible at the cost basis, whereas similar gifts to a donor-advised fund are deductible at the fair market rate.

Other benefits of donor-advised funds include the fact that donors can be anonymous (whereas donations to private foundations are public record) and investment profits of donor-advised funds are not taxed (whereas private foundations must pay a 1.39 percent excise tax on investment profits). However, both private family foundations and donor-advised funds provide unlimited deductions for donations from an estate.

Conclusion

Whether a family opts to create a private family foundation or a donor-advised fund depends on a number of factors, including the intended use of the fund, the desire to have full management control of the fund, and any number of personal preferences. Either way, philanthropic vehicles such as private family donations and donor-advised funds are a great way to limit tax liability while providing much-needed support to worthy causes.