Creating a private foundation to meet charitable goals.

• Author: Ellentuck, Albert B.

A PRIVATE FOUNDATION SET UP BY AN INdividual provides the opportunity to shift income to an entity that will be taxed at a minimal rate, achieve tax savings, and direct charitable giving, yet the individual maintains control over the assets used to fulfill charitable purposes. For some individuals, maintaining control over assets set aside for charitable commitments is important, while others would prefer to make an outright gift. If an individual has strong charitable convictions, a planned gift-giving program could include setting up a private foundation.

Private foundations are an excellent way to involve family in long-range charitable giving, investing and controlling funds available for charitable distribution, and meeting charitable commitments regardless of personal financial fluctuations. However, because of the restrictions on activities of a private foundation, the costs associated with operating one, and the limitations imposed on the deductibility of contributions, the practitioner should carefully analyze a taxpayer's goals to determine if a private foundation is appropriate.

Requirements and Characteristics of a Private Foundation

A private foundation is any organization described in Sec. 501(c)(3), other than a public charity, a publicly supported organization, or a supporting organization. The most common type is a nonoperating foundation. In simplest form, a non-operating foundation is a separate legal entity that holds funds as an endowment and uses the income to support other charitable activities and organizations. By contrast, an operating foundation (for example, a museum) uses its funds for its own operation, including the purchase and maintenance of assets.

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The foundation's assets can be used for religious, charitable, literary, scientific, and educational purposes, preventing cruelty to children or animals, or fostering amateur sports competition (other than providing athletic facilities or equipment) (Sees. 170(c)(2)(B) and 4942(g)(1)). A private foundation can also contribute to government entities described in Sec. 170(c)(1) (Regs. Sec. 53.4942(a)-3(a)(2)).

The benefits of establishing and funding a private foundation include the following:

Control: Once donors make gifts to public charities, they typically have no control over how their donations are used. However, with a private foundation, the donor is often also a foundation manager and so is able to control how the foundation invests...