Create a family foundation or other private foundation.
This option allows you to retain personal control and flexibility in your giving program, or to provide a forum in which family members and others can work toward common goals. Such foundations can support the long-term needs of the organizations and the people you want to help. Through endowed gifts, the donor’s influence can continue to make an impact for generations to come. Your foundation can be organized either as a nonprofit corporation or as a charitable trust. You can appoint yourself, as well as other family members or friends, to the governing board of the foundation. Since it is a charitable organization, it is exempt from federal income tax, and your gifts to it afford you certain tax advantages. You may deduct up to 30 percent of your annual adjusted gross income for cash donations. Gifts of stock or real property may also be deducted. Check with your tax advisor for details. If any of your gifts in any year exceed the allowed maximum deduction, you may carry over the excess deduction for up tofive years.
There are three main types of private foundations to consider:
- The private endowed foundation is the most common type of private foundation. The foundation’s financial assets create a principal—or endowment—that is invested, and income from the endowment is paid out annually to charity. Generally, the principal or endowment is not spent, only the investment income. Therefore, the principal can increase with good investment, ensuring the foundation’s continuation and growth to meet future community needs. By law, private foundations must pay out in annual grants funds totaling 5 percent of the value of their assets, and must pay a 1- to 2-percent excise tax on net investment income. Rules against “self-dealing” apply to private foundations, but do not preclude trustees from receiving “reasonable” compensation for necessary services to the foundation.
- The pass-through foundation is a private grantmaking organization that distributes all of the contributions it receives each year (not just 5 percent of assets). The pass-through option may be made or revoked on a year-to-year basis.
- The private operating foundation uses the bulk of its income to actively run a charitable program or service. Examples include the operation of a museum, library, research facility, or historic property. A private operating foundation may also choose to make some grants to other charitable organizations.
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Foundation Desk Reference
This book is a compendium of private foundation rules discussing everything you need to know to get organized. Written by Benjamin T. White, Esq., it is available for a nominal charge through the Southeastern Council of Foundations.