What is a Family Foundation?

A donor-advised fund allows families to give as though they’re a private foundation but provides greater tax benefits and no administrative burden.
A donor-advised fund allows families to give as though they’re a private foundation but provides greater tax benefits and no administrative burden.

Are you ready to engage with your family in philanthropy and grantmaking?

Private family foundations are commonly used to achieve family giving goals and jumpstart multi-generational giving.

Private family foundations are private foundations set up, funded and governed by families who make grants from their charitable endowments. They can be funded with cash, non-cash or other family-controlled assets.

A family governance system identifies who participates in giving priorities, grant recommendations, foundation goals and mission and ways to educate and incorporate younger family members over time.

Private family foundations are classified as a tax-exempt 501(c)(3) organization by the IRS and must abide by the same IRS guidelines as other types of private foundations. Unlike public charities, private family foundations do not raise funds or seek financial support from the public.

Setting up a private family foundation, however, can be complex and time-consuming due to:

  • Upfront and ongoing administrative requirements
  • CPA and lawyer consultations
  • Drafting and filing IRS documents
  • Obtaining a Tax ID number

Private Family Foundation Alternative: Donor-Advised Funds

Many have found that even though they have managed to get their private family foundation off the ground, maintenance costs are prohibitive. Resources can be quickly and significantly diluted by overhead and red tape.

One popular alternative to a private family foundation is a donor-advised fund, which allows families to give as though they’re a private foundation but provides greater tax benefits and no administrative burden.

A donor-advised fund is a simple, tax-efficient way for your family to give. You contribute family assets to the fund, take an immediate tax deduction, then support your family’s favorite community initiatives or nonprofit organizations when your family is ready.

Charitable sponsors, like The San Diego Foundation, manage all the heavy lifting for the donor-advised fund so your family can focus discussions on more important matters, like your philanthropic mission and grantmaking efforts.

Opening a family foundation through a donor-advised fund is easier and faster than establishing a private foundation. Also, it costs less when compared to the startup and ongoing expenses.

For example, your family can open a donor-advised fund through The San Diego Foundation for as little as $25,000 – whereas a private family foundation can easily run that much per year. Also, donors can deduct their donor-advised fund gift up to 50% of their adjusted gross income compared to just 30% of a private foundation gift.

Other benefits involve privacy and peace of mind.

Unlike an IRS private foundation, a family foundation through a donor-advised fund does not need to disclose certain financial information, such as tax returns. Beyond that, strict and complex legal requirements of a private foundation disappear – no worries about compensation rules, expenses, grant expenditure responsibility, tax filings, or any possibility of inadvertent self-dealing.

Due to these benefits, many funds at The San Diego Foundation were originally private family foundations before families decided to simplify their lives by moving to a donor-advised fund.

Interested in learning how donor-advised funds can simplify your family giving?

Since 1975, we’ve helped passionate, socially-minded San Diegans find ways to create positive impacts in communities across our region. Contact our Director of Development & Stewardship Cami Mattson at cami@sdfoundation.org or (619) 814-1385 to learn more.