If you’re looking for a way to structure your charitable giving to optimize the benefits for your family and your favorite causes, a private family foundation may be an option to consider. Although they can be complex to establish, they provide significant tax benefits, the ability to exercise control over your giving, and an effective way to establish a long-term charitable legacy.
What Is a Family Foundation?
A family foundation is a private nonprofit organization established by a family and funded primarily by the family for the purpose of supporting specific charitable causes that align with their values and goals. It is also often managed by family members. The family orientation differentiates it from charitable entities that rely on broader funding by the public and/or government.
Although there are multiple structures available for your charitable giving, establishing a family foundation provides the opportunity to involve more family members and multiple generations. Often structured to exist in perpetuity, private foundations can help families pass down a lasting philanthropic vision and impact.
How Does a Private Family Foundation Work?
A private family foundation is a tax-exempt entity, typically a 501(c)(3) nonprofit, funded by a single donor, family, or small group of donors. To justify the expenses involved in establishing this legal entity, most new private foundations are funded with initial endowments of at least $1 million. Initial funding and ongoing donations may be in cash, publicly traded stock, certain restricted or privately held securities, real estate, or tangible personal property.
A family foundation’s operations and decisions are overseen by a board of directors who are often family members. Private foundations have more flexibility in their grant-making than public charities—they can grant money to individuals, charitable organizations organized in the US or other countries, and scholarship programs. The board of directors has control over who receives these grants, how much those grants will be, and how the foundation’s assets are invested and managed. The day-to-day management may be handled by family members or professional investment managers.
What Are the Benefits of a Private Family Foundation?
Private family foundations can have multiple benefits, including:
- Philanthropic Legacy: They can be structured to continue operating for generations, offering a multi-generational impact.
- Family Involvement: They offer opportunities to engage not only more family members but also younger generations in a culture of giving and the establishment of family values and goals.
- Control Over Charitable Giving: As board members, family members can have direct control over grant decisions.
- Tax Benefits: These can include potential income tax deductions, estate tax planning, and capital gains advantages.
Private family foundation tax benefits are among the most popular reasons for establishing this type of entity.
Donors can deduct contributions to a family foundation from their income taxes—up to 20% to 30% of their adjusted gross income—depending on the type of asset donated. If they contribute appreciated assets, they may avoid capital gains taxes that would be due on the sale of those assets. Donations to the foundation are no longer part of the donor’s estate or subject to estate taxes. In addition, once donated, the assets can grow tax-free since the foundation is a tax-exempt organization. This helps maximize the impact these donations can have.
How to Start a Private Family Foundation
Family foundations are not the simplest structure to establish for your philanthropic activities, but the advantages can make the complexities worth navigating. Following these steps carefully can help ensure that your foundation is set up to last and maximize benefits for your family and chosen charities.
1. Define the Mission and Goals
Think about who you are as a family and what kind of impact you want to make on the world. You may be influenced by beliefs, personal experiences, or challenges you see not being met. Talk to other family members and sit down to make a list of the most important values and causes you want to support, whether they are medical, educational, environmental, community-related, artistic, or something else. Then, drill down on the goals of your support. What do you want to enable your grantees to accomplish? How can you best do that?
2. Choose a Legal Structure
Yes, a private family foundation might be the right choice for you, but review all your options before you make a final decision. Would a donor advised fund or charitable trust be better for your purposes? You can also combine multiple forms.
3. Fund the Foundation
Determine how much you have to give now, as a family, and how you want to make recurring donations in the future that can help the foundation meet its goals. Friends and other supporters can also make contributions to your foundation if you want to allow that.
4. Establish Governance
Who will be on the board of directors? Pick family members or other supporters who are passionate about the foundation’s mission and willing to dedicate the time and effort required to make important decisions.
5. Apply for Tax-Exempt Status
This is an important step. To apply for exemption, a foundation should obtain and complete the required IRS forms and submit them along with the required fee. For the exemption to be effective from its date of formation, all required forms generally must be submitted within 27 months of the foundation’s creation.
6. Help Ensure Ongoing Compliance
Once you set up a private foundation, there are rules set by the IRS that you must follow to keep your tax-exempt status and avoid fines or other penalties. Your financial advisor or tax advisor can help you understand and comply with these rules.
Private Family Foundation Rules and Compliance
Even though these entities are exempt from regular income tax, there is an excise tax on the net investment income of most domestic private foundations. This tax must be reported on Form 990-PF and must be paid annually or in quarterly estimated tax payments if the total tax for the year is $500 or more.
There are also several restrictions and requirements on private foundations, including:
- Self-dealing rules designed to prevent foundation assets from being used for the personal benefit of substantial contributors.
- Minimum distribution requirements outlining how much the foundation must annually distribute in the form of grants or other charitable activities.
- Limits on the foundation’s holdings in private businesses.
- Provisions to help assure that the foundation’s expenditures support exempt purposes and that its investments do not jeopardize the carrying out of exempt purposes.
- Public reporting requirements for all contributions received and grants paid.
Should You Start a Private Family Foundation?
The answer to whether you should start a private family foundation depends on how much you have in available assets you want to donate, how involved you want other family members to be, how much control you want over your grants, and more. Possibly the most important factor is how actively you want to be involved yourself. For some people, philanthropy is a matter of writing a check and leaving the rest to others. However, if you want to do more—like operate a charitable organization and potentially employ a staff, hire investment managers, actively manage grant-making, and sponsor charitable events—creating a private family foundation could be a great choice for you.
Get Professional Guidance on Family Foundations
A private family foundation can provide a great deal of personal satisfaction and impact on the world around you, but it is complex to establish and manage. Also, to maximize the benefits and avoid wasting financial opportunities, it’s important to align the goals of your foundation with your own wealth management and estate planning goals. Fortunately, you don’t have to do all of this alone. An experienced financial advisor can be the partner you need to help ensure that your foundation can accomplish everything you want from it.
To be custom-matched with an advisor you can trust to support your goals with personalized planning and to help ensure that all parts of your financial plan align, take advantage of our advisor matching program today.
You should consider the counsel of an experienced Tax or estate planning professional before implementing such strategies. The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.
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