What is a private foundation?
How a private foundation compares to other charitable organizations.
A private foundation is a type of charitable organization that is typically established by an individual, family or corporation to support charitable activities. A board of directors or trustees oversees a private foundation and is responsible for receiving charitable contributions, managing and investing charitable assets, and making grants to other charitable organizations. It is also responsible for filing tax returns and other administrative reporting requirements.
Two types of private foundations
The IRS classifies every section 501(c)(3) organization as either a private foundation or a public charity. A private foundation is typically controlled and funded by an individual or family: The Bill & Melinda Gates Foundation is a well-known example. A private foundation is also subject to more-stringent tax laws and regulations than public charities. There are two types of private foundations:
- Operating foundations are directly involved in operating a charitable project or enterprise such as a museum.
- Non-operating foundations serve their charitable purpose primarily by making grants to charities. Although they can operate programs, that isn’t their primary purpose.
Non-operating foundations are the most common type of private foundation, and they can be organized in a variety of ways. For example, a non-operating family foundation typically represents the assets and interests of a single family, while an independent foundation, such as the Ford Foundation, is managed independently from the benefactor, the benefactor’s family or a corporation.
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 grantmaking, you can support organizations other than 501(c)(3) public charities. By following IRS procedures, donors can make grants to charitable programs undertaken by individuals, scholarship programs and other entities, making a foundation one of the most flexible charitable vehicles when it comes to supporting certain types of giving.
Other benefits include:
- Potential immediate tax deduction—up to 30 percent of adjusted gross income for cash gifts and up to 20 percent of adjusted gross income for long-term appreciated publicly traded assets.
- Potential elimination of capital gains tax for gifts of long-term appreciated securities.
- Ability to accept many types of assets.
In some cases, the tax treatment for contributions to a private foundation are less advantageous than the tax treatment of donations to public charities, including donor-advised funds.