Article:
Private Foundation
by Paul H. Roskoph
July 1, 2006
A private foundation is an excellent device for charitable giving when it is desired to bring the family into the overall philosophy and to allow them to grow in the charitable structure as a family activity. There are many benefits to a private foundation but, since it is private and does not require any outsiders to be involved (other than the overview by the IRS), and charitable deductions are allowed for contributions to the foundation without the full amount going to other charitable institutions immediately, there are many restrictions and rules associated with the implementation and administration of a private foundation.
Deductions:
A contribution to a private foundation may be deductible for marketable securities equal to their fair market value (rather than limited to the cost basis) when those securities are readily tradable. If they are not readily tradable, the charitable deduction is limited to the cost basis. (California historically has limited the deduction to cost basis, but has recently conformed with the federal law.)
The contribution deductions against the individual income tax is limited to 20% of adjusted gross income when marketable securities are used. This is one-third lower than the 30% limitation measured by adjusted gross income for gifts of securities to public charities.
The private foundation must also distribute 5% of its investment assets to charities, and is required to pay a 2% excise fee measured by the annual income to the organization. (This 2% excise tax may be reduced to 1% if the minimum distributions made are increased by the 1% factor; that is, if 6% of the value of the asset base is contributed for charitable purposes, including reasonable administration expenses the excise tax is reduced to 1%.)
Governance:
The private foundation is managed by a Board of Trustees. These may be limited to the family members. The foundation typically has officers, and at least two people must serve, since the president may not serve as either secretary or treasurer of the entity.
The timing for the creation of the foundation is generally measured by the year in which a substantial gift is planned to be made. Alternatively, it can be used as a "holding-place" pending a substantial testamentary contribution. Even if current funding is unlikely, but certain as a bequest at death, we recommend the foundation be formed during the lifetime of the donor to assure that the exemption status is achieved. Conversely, even if only minimal annual contributions will be made by the foundation, if there is a substantial income year, it does make sense to establish the foundation in that year to achieve the tax deduction resulting from the transfer of assets from the personal account to the foundation account, still under the management of the donor. The client/donor's income stream and objectives take priority.
Use with CRTs:
It is quite common that private foundations will be the charitable recipient of a charitable remainder trust established by the donor. The charitable remainder trust may be required to pay a fixed percentage or fixed dollar amount to the designated lifetime beneficiaries for a number of years or their lifetimes, with the remainder passing to a charity. The charity may be a group of public charities or a private foundation (or a combination thereof). This is an effective way of obtaining the CRT deduction, retaining the lifetime or term distribution from the CRT and having the remainder value pass to the family foundation for continued management.
IRS Restrictions:
There are many restrictions imposed on private foundations by the Internal Revenue Service. These relate primarily to prohibition on self-dealing and unreasonable compensation.
If you would like further information or are interested in establishing a private foundation, please contact our office by email or at (650) 470-5300.
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