Community foundations offer many useful tax advantages.

• Author: Bank, Malvin E.

Many tax advisers are not aware that a community foundation may be a simple and extraordinarily attractive alternative to direct contributions to operating charities or to the establishment of private foundations. A community foundation is an aggregation of funds held for the charitable benefit of a community in perpetuity, the income of which is used to meet the community's charitable needs.

Both individuals and corporations can obtain significant tax advantages by giving to a community foundation, and still retain much of the satisfaction of being involved with their favorite charities. The donor obtains the maximum tax deduction for both federal and state income tax and estate tax purposes. A donor with variable income can build a fund in the community foundation by giving the optimum amount each year that makes sense in terms of that year's income.

The donor cannot exercise the amount of control over the charitable gift that is possible through creation of a private foundation, but the donor can, for example, suggest the charity or charities that will receive proceeds from the gift. The donor can also elect to establish an endowment in a community foundation, choose the name of the endowment and direct the foundation to apply proceeds from the endowment to a particular charity or field of interest.

In making a typical gift to an operating charity, a donor places complete dominion over the gift in the hands of the charity. If the charity's purposes change or the charity otherwise become unworthy of continued support, the donor will have no influence on assets held by the charity as a result of the donor's past generosity. If, on the other hand, a donor makes a gift to a community foundation with the general intention of supporting a particular operating charity, the donor may retain a degree of influence over the gift.

Depending on the arrangement with the community foundation, a donor may choose to have all of the income from the gift allocated to one operating charity in one year and to another operating charity--or, indeed, to many other operating charities--in a later year. Moreover, while a donor to a private foundation may retain a considerable degree of control over assets contributed to such a foundation, community foundations are clearly superior to the typical private foundation in terms of tax benefits as a potential recipient of a donor's contributions.

Because community foundations are organized as public charities under...