There are a number of benefits for clients who wish to setup a private charitable foundation, such as:
Donors can make tax-deductible donations and still remain in control of the investment and management of the funds as trustees/board members. Furthermore, the foundation can continue to serve the clients charitable purposes after death.
A foundation provides a vehicle to bring family members together for a common cause or purpose. It provides a unique opportunity for family members to serve on a board or as trustee and to gain experience in administering and operating a foundation for charitable causes. Finally, it is a vehicle to introduce family members to the community, thereby providing a gateway to meet with community leaders and other individuals.
Family members serving as board members or trustees can receive salaries, although there are strict guidelines for doing so and if not necessary it is desirable to avoid them altogether.
Income Tax Deduction
The donor is able to take an income tax deduction immediately. Highly appreciated assets that are donated to the foundation can avoid capital gains tax and allow the donor to take an income tax deduction of 20% of adjusted gross income (with a 5 year carry forward for any unused income tax deduction). Cash contributions generally receive a 30% income tax deduction (with a 5 year carry forward).
Gift Tax Benefits
Gifts to the private charitable foundation do not affect the client’s annual gift tax exclusion or lifetime gift tax exemption.
Estate Tax Benefits
Assets transferred to a private charitable foundation are not subject to estate tax.
Types of Private Charitable Foundations
Private charitable foundations can be established as trusts or corporations, and during a client’s lifetime or at death. In addition, private charitable foundations can be subdivided into two further categories:
Private Operating Foundation
This type of foundation devotes most of its resources to the active conduct of its exempt activities. For example, a foundation created to operate a homeless shelter. (A more complete description of the types of foundations which fall under this category can be provided during a consultation with our attorneys.) The administration of these foundations can be extremely complicated and expensive to operate.
Non-Operating Foundation (or Private Pass-Through Foundation)
This type of foundation typically makes grants to help fund the efforts of other organizations or individuals. For example, a foundation created to provide grants to unrelated homeless shelters. The set up and administration of these foundations is a simpler process as it does not involve direct services and only supports other organizations by making grants.