Some people believe that a private foundation provides their only option for long-term involvement with assets they set aside for charitable purposes. In reality, a charitable fund or a supporting organization at a community foundation offers numerous advantages and avoids many of the hassles of private foundation management. In addition, it provides real ways for the donor to stay engaged in giving.
In the alternative, some people may have already established a private foundation. In this case, they may find that there are several benefits to transferring it to a giving vehicle at a community foundation. Their charitable intent, name, and pattern of charitable giving are maintained—-in perpetuity if they wish.
Establishing a Fund vs. Creating a Foundation
There are many practical reasons why establishing a charitable fund might make more sense than creating a private foundation. To download a chart that compares a private foundation to charitable funds and supporting organizations, please click here.
- 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.
- 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.
- 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.
- 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.
- A community foundation donor may remain anonymous. A private foundation must make available to the public the name and address of any substantial contributor.
- 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.
- There are fewer legal 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.
- 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.
- There are fewer IRS reporting requirements on community foundation grants and funds, and those IRS requirements are handled by our staff at no extra charge to individual donors.
- Charitable gifts to a charitable 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.
We welcome the opportunity to discuss the advantages and disadvantages of a private foundation vs. a charitable fund. Our desire is always to help identify a solution that works best for the donor. Contact our staff
to learn more.