If you are looking for a way to create a tax-advantaged charitable vehicle, you may consider establishing a private foundation. A private foundation offers the founding individual or family several tax benefits.
What is a Private Foundation?
A private foundation is a charitable organization that is founded by an individual or family with an initial gift and managed by its own trustees and directors.
Is it the Right Fit?
Before establishing a private foundation, the following items should be taken into consideration in determining if a private foundation would be a good fit for you.
- A private foundation is established as its own legal entity. The founder can appoint its own board of directors or trustees.
- Legal and financial control remains within the family if the board or trustee so chooses.
- A private foundation may hire and compensate staff, including family members, to provide professional services to the foundation as long as it is a reasonable compensation.
- A private foundation may grant out all its assets into a donor-advised fund.
- A private foundation must file an IRS Form 990-PF annually which lists assets, contributors, and grantees. The private foundation tax returns are available for public inspection. State filings may also be required.
5 Tax Benefits of a Private Foundation
- Assets contributed to a private foundation can grow in a tax-advantaged vehicle, and you can pass control of the assets to future generations to continue your philanthropy.
- The donor will receive an immediate income tax deduction for their contributions to the foundation even though the gifting to charitable organizations can be made over time. Cash donations are deductible up to 30% of your adjusted gross income and appreciated assets are deductible up to 20% of your adjusted gross income.
- Donors may be able to avoid paying individual capital gain taxes by donating highly appreciated assets to a private foundation. The donor would receive an income tax deduction for the fair-market value on the date of contribution. When the foundation sells the stock in the future, it will only pay an excise tax of 1.39% on the net capital gain.
- The IRS requires that private foundations meet an annual 5% minimum distribution requirement based on the previous year’s net average assets.
- The donor can exclude the assets contributed to a private foundation from their estate. For high-net-worth individuals who have a strong charitable interest, private foundations offer an opportunity to avoid paying estate taxes while creating a lasting philanthropic legacy.
Another charitable vehicle you may be interested in establishing is a donor-advised fund. Learn about its potential tax benefits here.
Please contact your Untracht Early advisor if you want help in determining the specific tax benefits you may receive by establishing a private foundation.