What is a Private Foundation?

Setting up a private foundation, donors will
maintain complete control over branding and investments.
Setting up a private foundation, donors will maintain complete control over branding and investments.

The COVID-19 pandemic and systemic racism have dominated headlines in 2020. Less talked about, however, is how philanthropy is supporting those in need and bringing positive change in these areas and more.

According to the Chronicle of Philanthropy, Coronavirus-related giving has topped $10 billion worldwide, including $6 billion from U.S. sources.

If you’re exploring ways to increase your (or your family’s) charitable giving in 2020 beyond making a singular donation, a private foundation is a popular starting point.

Private Foundation Definition

According to the Council on Foundations, “private foundation” is the umbrella term that includes corporate, independent, family and operating foundations. These independent legal entities make grants from their charitable endowments, which consist of funds coming from one or a small list of sources — an individual, a family or a company.

The fund is managed by the foundation’s own appointed trustees or directors.

Like public charities, a private foundation is classified as a tax-exempt 501(c)(3) organization by the IRS. Unlike public charities, however, a private foundation does not raise funds or seek financial support from the public.

Some of the most well-known U.S. private foundations are The Bill and Melinda Gates Foundation, Ford Foundation and The Rockefeller Foundation.

2 Types of Private Foundations

The two types of private foundations are:

  1. Private Operating Foundations
  2. Private Non-Operating Foundations

Operating foundations are private foundations that use the bulk of their income to provide charitable services or to run charitable programs of their own. They make few, if any, grants to outside organizations.

The more common type of private foundation is the non-operating foundation. These entities generally serve their charitable purpose by granting to other nonprofit organizations.

Benefits of a Private Foundation

There are benefits to establishing a private foundation. Because a private foundation stays under your control, you determine:

  • Your foundation’s mission and branding
  • Board appointments
  • Grant recipients
  • Investment decisions

Your private foundation can also be part of your family’s legacy and encourage generational giving.

However, starting a private foundation can be harder than it looks. It requires exhaustive time and resources, not to mention the magic ingredient of expertise to ensure all legal requirements are met.

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

“There are many advantages to a private foundation, especially family control that can last for generations,” said Lynda Sands, JD, MBA, who has advised nonprofits, families and businesses in high-net worth philanthropic planning and the creation of private foundations and new public charities for 40 years. “The emotional rewards of making grants that impact the lives of others are almost tangible. The control over investments and the ability to make grants directly to individuals, if such a program is approved for exemption, can be very gratifying.

“But are there other ways to achieve similar results?”

Private Foundation Alternative: Donor-Advised Fund

If you’re considering starting a private foundation, you may want to consider pressing the “easy” button instead and opt for a simpler solution with a donor-advised fund.

While you may maintain complete control over branding and investments with a private foundation, you are also subject to IRS requirements, must research and secure your own investment vehicles, and are burdened with startup costs, taxes and administration fees.

Donor-advised funds give you almost all the benefits of a private foundation without the administrative burden, including the ability to determine exactly how your individual program is structured and to recommend all grants to the nonprofit of your choice. Opening a donor-advised fund requires less cost when compared to the startup and ongoing expenses of a private foundation.

Also, donors can deduct their donor-advised fund gift up to 50% of their adjusted gross income compared to 30% of a private foundation gift.

Other benefits involve privacy and peace of mind.

Unlike an IRS private foundation, a family foundation does not need to disclose certain financial information, including 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.

When you add up all the benefits, it’s no surprise that many family and corporate funds at The San Diego Foundation were originally private foundations before partnering with a community foundation for their charitable giving. And for some, The San Diego Foundation’s deep understanding of San Diego’s diverse regional challenges and the nonprofits working to address them is attractive and useful in helping shape charitable giving programs.

Private foundations are powerful giving vehicles, but they may not be the most beneficial strategy to accomplish your goals.

Interested in learning how donor-advised funds could be an alternative to a private foundation for you, your family or your company? Contact us.