Foundations

These entities are a favored way for individuals to make philanthropic contributions while maintaining control or direction over the assets contributed. The foundations can be private or established as a “fund” in an existing foundation.

Foundations and the IRS (the boring facts)

(scroll down for comparisons between private foundations and funds)

Every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term (referred to in section 509(a)). In addition, certain nonexempt charitable trusts are also treated as private foundations. Organizations that fall into the excluded categories are generally those that either have broad public support or actively function in a supporting relationship to such organizations. Organizations that test for public safety also are excluded. Even if an organization falls within one of the categories excluded from the definition of private foundation, it will be presumed to be a private foundation, with some exceptions, unless it gives timely notice to the IRS that it is not a private foundation. If an organization is required to file the notice, it must do so within 15 months from the end of the month in which it was organized. Generally, foundations use Form 1023, Application for Recognition of Exemption, for this purpose.

There is an excise tax on the net investment income of most domestic private foundations. Certain foreign private foundations are also subject to a tax on gross investment income derived from United States sources. This tax must be reported on Form 990-PF, Return of Private Foundation, and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year is $500 or more.

In addition, there are several restrictions and requirements on private foundations, including:
1. restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons;
2. requirements that the foundation annually distribute income for charitable purposes; limits on their holdings in private businesses;
3. provisions that investments must not jeopardize the carrying out of exempt purposes; and
4. provisions to assure that expenditures further exempt purposes.

Certain trusts that have charitable interests as well as private interests may also b subject to some of the private foundation tax provisions.

Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons.

A private foundation cannot be tax exempt nor will contributions to it be deductible as charitable contributions unless its governing instrument contains special provisions in addition to those that apply to all organizations described in 501(c)(3).

Advantages of a Private Foundation over a Fund

1. Donor maintains more control

2. Donor can name trustees to oversee investment management as well as accounting, auditing services and tax preparation services

3. Donor can name trustees to oversee general administrative services

4. Donor can name trustees to oversee general liability and insurance services

Advantages of a Fund over a Private Foundation

1. A fund is easy and inexpensive to establish. A private foundation requires a donor to create a new organization, apply for tax-exempt status, pay filing fees and incur legal and accounting expenses

2. A gift of cash to a charitable fund allows a deduction of up to 50% of a donor's Adjusted Gross Income (AGI). A gift of cash to a private foundation allows a donor to deduct up to 30% of AGI

3. By creating a charitable fund, a donor may deduct gifts of closely held long-term appreciated stock at its fair market value, up to 30% of AGI. If the same gift is given to a private foundation, deductibility may be limited to its cost basis up to 20% of AGI

4. No tax is imposed on the investment income of a charitable fund because it is a component of a public charity. A private foundation pays up to 2% federal excise tax on its investment income and net realized capital gain

5. A community foundation donor may remain anonymous. A private foundation must make available to the public the name and address of any substantial contributor

6. There are no minimum distribution requirements for a charitable fund at a community foundation. A private foundation must annually distribute at least 5% of its net investment assets, regardless of whether the amount is actually earned

7. There are fewer restrictions on a charitable fund. For private foundations, however, there are strict regulations regarding self-dealing between the foundation and those who manage, control, or contribute to it and persons or corporations closely related to them. For example, a private foundation, along with its donor and other "disqualified persons" (including members of the board and staff), may not hold more than 20% of a related corporation's voting stock

8. There are fewer investment restrictions on a community foundation's funds. A private foundation may not make certain types of investments. For example, a community foundation may hold more than a 20% ownership in a particular corporation, but private foundations may not

9. There are fewer IRS reporting requirements on community foundation grants and funds, and requirements that do exist are handled by the foundation's staff at no extra charge to individual donors

10. Charitable gifts to a community foundation fund are almost always considered "public support," thus helping the recipient charity retain its public charity status. A private foundation grant is usually not considered "public support" in its entirety and, thus, may not be as helpful to the recipient charity in retaining its public charity status

Shoreline’s Competitive Edge
We are a network of independent professionals with over 150 years of combined experience in wealth management and advice. Members of this network can be used individually or collectively for a single program or a series of seminars or workshops for your company or organization.

For more information:
If you’d like more information about how diversified investment advisors can help you achieve your financial objectives through personalized wealth or retirement and risk management strategies, please contact us. We welcome the opportunity to discuss your unique needs and how we may best meet them.

This page is updated regularly so check in from time-to-time to see new articles and updates. You can click on any underlined words on each page to view a specific link or in the left margin of each page to explore a specific wealth management topic.

Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

The information contained in this web site is neither an offer nor solicitation of any security or service.

All photos courtesy of Shoreline Summit Photography