Personal Philanthropy: Family Foundations

A private foundation is an excellent tool if you have any charitable intent and yet at the same time a desire to create a perpetual legacy for your children and future generations to come.

Creating a family foundation during your lifetime can reward you and your family in many ways. Some of the reasons why are as follows:

• Your family may feel more unity when involved in the foundation’s activities and experience more meaningful family interaction and an increase in family pride;
• Your family may enjoy new rewarding acquaintances (giving creates social opportunities);
• Your family may feel more security as its influence and power in the community expands;
• When your family is known for making gifts, the community approaches you and educates you as to their needs and the solutions that are being offered for
  those needs;
• Foundations allow your family to join and enjoy the benefits that come from grantmaking affinity groups;
• When your family is researching an organization (to whom you are considering making gifts), they often allow you to
  see inside their organizations in ways not generally available to outsiders;
• Your family may often receive preferential treatment, such as being given tours and invited to special events;
• Foundations make the expense of charitable giving tax-deductible: expenses such as trips for grant research, foundation facilities or family gatherings
  to discuss gifts;
• Foundations protect the assets from taxation, personal creditors, spendthrift heirs and your children’s potential divorcing spouse;
• Foundations allow you to create for yourself, your children, and others, salary-paying positions of prestige (board directorships or executive officer positions);
• The deductibility limits to a private foundation are subject to lower limitations than if you were to make donations to a public charity.

Effective January 1, 2018, you may contribute cash to a public charity and deduct an amount equal to as much as 60% of your adjusted gross income (AGI). However, when you contribute cash to a private foundation, your deductible amount may not exceed 30% of your AGI.

Donating appreciated property, such as stocks, bonds or real estate, allows you to receive a deduction for the fair market value of the property without paying tax on the appreciation. If you contribute appreciated property to a public charity, then you may deduct an amount equal to as much as 30% of your AGI. However, when you contribute appreciated property to a private foundation, your deductible amount may not exceed 20% of your AGI.

Due to the closely held nature of private foundations and the potential for abuse, there are certain limitations and requirements imposed on private foundations which include:

• Restrictions on self-dealing with substantial contributors and other disqualified persons;
• Mandatory distributions of at least 5% of its assets for charitable purposes;
• Limits on holdings in private businesses;
• Provisions that investments must not jeopardize the carrying out of exempt purposes;
• Provisions to assure that expenditures further exempt purposes;
• Maintenance of accurate accounting records including information of contributions from donors / to donees;
• Annual reporting of activity to the IRS and state agencies, which are open for public inspection;
• Net investment income is subject to a 1-2% excise tax.

Creating a family foundation is a long-term philanthropic commitment that can prove a rewarding experience for you and your family for generations to come.

Author: Don Foster, CPA, CCFIP®, Manager, Construction Services  |  dfoster@withum.com