Many of us give generously to charity—especially during the holiday season. But if you’ve been giving by writing checks or clicking “donate” online, you should know that giving through a private foundation offers tremendous advantages not only for the causes you support but also for you as an individual donor.
As the end of the year approaches, you might be thinking about establishing a charitable vehicle to give back to your community, engage your family in your philanthropy, and maximize your tax savings. Setting up a foundation entitles you to claim a same-year tax deduction—even if you establish your foundation in late December and don’t make a single grant this calendar year. That’s because, with a private foundation, you get the tax deduction up front when the foundation is funded, and then have time to make your charitable gifts, preserving flexibility and enabling you to give strategically.
Private foundations offer other important tax savings, helping you avoid capital gains tax liability as well as estate and gift taxes. You can donate appreciated assets to your foundation, such as low-basis stock that you’ve held for years, and realize a tax deduction for their full fair market value of (up to 20% of adjusted gross income with a five-year carry forward). Foundation assets are exempt from estate and gift taxes, yet remain under your control. Contributions to your foundation are irrevocable and must be dedicated to charity. In practice, this means that when you donate assets to a foundation, they’re removed from your estate for tax purposes, but you and your family can continue to decide how those assets will be invested, and enjoy full discretion over where and how they will be distributed for years to come.
Because the assets in a foundation are in a tax-advantaged environment, they can grow substantially through compounding. And since the majority of private foundations are set up to exist in perpetuity, over time, your initial funding can become a considerable endowment that can be passed down to your family from one generation to the next. A foundation that has been in existence for a few generations could easily become a significant player in the community, forever linking your family name with good works—and those “good works” could take any form your imagination dictates.
Although donors routinely use their private foundations to make grants to U.S. public charities, that’s not all they can do with them. Private foundations are an entrepreneur’s dream come true because the IRS gives them broad latitude to pursue almost any philanthropic strategy, cutting out the middleman and putting tax-advantaged dollars where they’ll do the most good. So, if you want to give to a small, privately run orphanage in Africa that’s unknown to the IRS, you can do it. If you want to help individuals and families struggling to rebuild in the wake of a hurricane, you can put funds directly in their hands rather than writing a check to a relief agency. And if you want to create your own scholarship program and choose the recipients (something you can’t do through your alma mater’s scholarship fund), a private foundation is your vehicle of choice.
To advance their charitable purpose, private foundations can even function like banks or private investors. Let’s say you’d like to extend credit to a local bakery employing homeless people or make a low-interest loan to a local theatre company to upgrade their stage. You can use your private foundation to make Program-Related Investments (PRIs)—loans, loan guarantees, and equity investments, which provides valuable support while getting a return on your investment, either through repayment or return on equity.
If you’d like to take a “hands-on” approach to giving back, you can use the funds in your foundation to run your own charitable programs and take on activities that local nonprofit organizations aren’t doing: produce an educational documentary to raise public awareness of an issue of personal concern, hire professional musicians to give lessons in a public school that lost its arts programming due, or purchase used college textbooks to ship back to schools in a developing nation. You can even run a winter coat exchange without setting up a separate nonprofit.
Although private foundations are unmatched for their combination of philanthropic versatility, control over investments, and tax advantages, many families prize them because they help children understand both the power and responsibility of wealth. By seeing how the foundation manages its investments, deliberates over its grants and expenses, and impacts the communities it serves, children learn the value of money in ways no lecture can ever hope to match.