Last week we discussed a few ways to incorporate charitable giving into your financial planning, and in keeping with the spirit of the season we’d like to dive a little deeper into the topic.
Many communities are lucky to contain individuals who consider giving back an integral aspect of their larger purpose, and continuously donate large gifts to charitable organizations in order to make a positive impact. These high-net worth individuals who take philanthropy very seriously often end up making a series of substantial ($5 million+) gifts to causes that are meaningful to them.
In these circumstances, founding a private foundation can be helpful in providing these donors with the oversight and control that ongoing large donations generally require.
Unlike public charities, private foundations have a 501(c)(3) status under the US Internal Revenue Code. Rather than conduct charity themselves, foundations are grant-making organizations, which means that they make donations (AKA grants), to other charities in order to help with operating expenses or support a specific program. As the name suggests, private foundations are privately funded and controlled.
Private foundations are an excellent way to establish a legacy, make long-term connections with charities, maintain control over how charitable gifts are being used, and take advantage of the deductions and estate planning benefits that accompany charitable giving. However, establishing a private foundation is also much more involved than the standard donation process.
Types of Foundations
The first thing to consider when establishing a private foundation is whether or not you would like it to be nonoperating, operating, or company-sponsored. Each type of foundation have different regulations and guidelines as well as different responsibilities.
Nonoperating foundations are the most common. A donor or group of donors make contributions to the foundation, and the foundation makes grants to a charity, but are not directly involved in the work itself. An operating foundation on the other hand may have direct involvement in the charitable causes while retaining the tax benefits of a private foundation, provided they meet specific requirements.
Company-sponsored foundations are appropriate when most of the contributions are coming from a for-profit corporate donor. They usually function similarly to nonoperating foundations, but are managed by corporate officers.
Once the type of foundation has been selected, the structure needs to be decided upon. A foundation can be a nonprofit corporation, a trust, or an unincorporated association. A charitable trust can be easier to operate, but do not offer trustees with as much legal protection, while nonprofit corporations are the most common as they limit personal liability and enable more flexibility in how funds are used, although they do have stricter operating requirements. Consider the long-term goals of the foundation, the state and local laws surrounding foundations, the type of foundation and donors, and personal preferences when deciding how to structure a private foundation.
The Investment
Starting a private foundation is essentially founding a new business, and will require a lot of investment in terms of time and money. It’s important to enlist the help of legal and accounting professionals with experience in creating and operating a foundation, since the process is very complex. Hiring specialized legal and tax professionals will incur substantial expenses, and the costs associated with foundation management, grant administration, and other aspects of operation will be costly as well.
There are also many rules about how to properly maintain a private foundation, so the investment and responsibility will be on-going throughout the life of the foundation. Typically, a private foundation is only a good option for those who make periodic gifts exceeding $5 million.
The Benefits
Contributions to a private foundation are deductible for gift and estate tax purposes, although there are specific rules that apply to ensure that gifts qualify for those deductions and sometimes the deductibilty cap is lower for private foundations.
But beyond the advantages of a tax deduction, private foundations have many other benefits as well. A foundation can consistently fund a chosen cause, allowing the donors to create a long-term, permanent impact and connection in their community. Often times, establishing a private foundation creates many more opportunities to give back as well.
Starting a foundation can also establish a philanthropic legacy for a family or individual, and many foundations bear the founder’s family name, or are named after a loved one who has passed away as an homage. A private foundation is also a mechanism for controlling contributions to charities, giving the donor more influence over how their gifts are being used.
Budget for Giving
Whether a private foundation is the appropriate vehicle for your donations or not, building philanthropy into your financial plan is the best way to ensure you’re able to give back to your community consistently. Reach out at info@nestfinancial.com and learn how a financial plan can help you manifest your goals and align your finances with your values. Call for a no-obligation initial consultation and join the other families and individuals in Austin and the surrounding Hill Country area who are enjoying the freedom and confidence that comes with a NEST Financial Plan!
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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.
