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What is a private foundation?

A private foundation is a charitable organization typically established by an individual or family member with a substantial initial gift. Private foundations are overseen by a board of directors or trustees responsible for receiving charitable contributions, managing and investing charitable assets, and making grants to other charitable organizations.

The primary advantage of a private foundation is the ability of the donor to maintain some level of control over it, such as its mission, how the assets are invested, and the affairs of the foundation.

How a private foundation works

Who’s a good fit for a private foundation?

Individuals interested in becoming more immersed in the execution of their giving strategies including operating an organization, potentially hiring a staff and investment managers, actively managing grant making and sponsoring charitable events are good candidates for a private foundation.
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Private foundation vs. public charity

Every section 501(c)(3) organization is classified by the IRS as either a private foundation or public charity. A private foundation is typically controlled and funded by an individual or family much like the Bill & Melinda Gates Foundation. Public charities on the other hand are generally funded by the public and include organizations such as churches, hospitals, schools, and research organizations. Private foundations are subject to more stringent tax laws and regulations than public charities.

Benefits of a private foundation

Establishing a private foundation can create a legacy beyond your lifetime and allow family members to be employed or serve as members of the board. In addition, with full control over grant making, you can support more than 501(c)(3) charities. By following proper IRS procedures, grants can be made to additional causes including charitable programs undertaken by individuals, scholarship programs, and other entities.

Other benefits include:

  • Potential immediate tax deduction—up to 30% of adjusted gross income for cash gifts and 20% for long-term appreciated publicly traded assets
  • Potentially eliminates capital gains tax for gifts of long-term appreciated securities
  • Ability to accept many types of assets
  • Flexible grant making, even beyond public charities, within IRS requirements

Funding a private foundation

A private foundation receives its funding from one or very few donors, usually an individual, family, or business rather than from the public. Typically, the establishment of a foundation involves a $1 million or more charitable donation and can include a variety of assets such as:

  • Cash
  • Publicly traded securities
  • Life insurance and annuities
  • IRA assets
  • Real estate
  • Private equity

Private foundation rules

There are several administrative and tax consequences to take into consideration before starting a private foundation.

  • Generally require a substantial initial contribution
  • Charitable deductions are limited to 30% AGI for cash and 20% AGI for long-term publicly traded appreciated securities, as compared to the 50%/30% limits with other charitable vehicle options
  • Non-publicly traded contributions, such as privately held stock or real estate, may only be deductible at basis rather than FMV
  • Administratively complex and require legal setup and ongoing maintenance, including annual filings and other reporting, eliminating the option to give anonymously
  • Require a 5% distribution of assets each year
  • While private foundations are exempt from federal income tax, the investment income is subject to a 1% to 2% excise tax

Consider a donor-advised fund

Consider a donor-advised fund as a complement or an alternative to a private foundation. Although private foundations are powerful giving vehicles, they can be costly and time consuming to maintain. Donor-advised funds offer improved tax deductions, increased grant flexibility and anonymity at a lower cost than foundations. In some cases, you may also consider using a donor-advised fund in addition to your private foundation for greater flexibility.

Advantages of a donor-advised fund include:

  • Streamlined recordkeeping and resources — The sponsoring organization of a donor-advised fund handles the administrative tasks, distribution of grants, and ensuring compliance with legal requirements.
  • Tax benefit — The tax deduction limit for gifts of cash to a public charity that sponsors a donor-advised fund is 50% of adjusted gross income; for a private foundation, it is only 30%. For donor-advised funds, the deduction limit for gifts of stock or other assets is 30% of AGI, while the limit is 20% for foundations.
  • Other tax considerations — Both charitable vehicles minimize capital gains, but a private foundation involves complicated rules and regulations. In addition, a private foundation will incur an excise tax on net income where a donor-advised fund does not.

Learn more about donor-advised funds and how they work.

Collapsing a private foundation into a donor-advised fund

A variety of factors could lead to wanting to collapse a private foundation, ranging from the death of the original founder to a desire for greater privacy in charitable affairs. A popular solution is to dissolve the foundation and distribute its assets to a public charity, such as a donor-advised account at Fidelity Charitable®. This strategy provides a way for individuals to meet their philanthropic goals and support charities during their lifetime and beyond.

Fidelity Charitable can provide guidance about the general steps of collapsing a private foundation, but before undertaking such a process, donors should consult with a legal and/or tax advisor. Fidelity Charitable does not provide legal or tax advice.

Fidelity Charitable can help

Improve your giving strategy

Since 1991, we have been helping donors like you support their favorite charities in smarter ways. We can help you explore the different charitable vehicles available and explain how you can complement and maximize your current giving strategy with a donor-advised fund. Join over 100,000 donors who choose Fidelity Charitable to make their giving simple and more effective.

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