Private Foundations: An Overview
More and more Americans are starting private foundations. This giving vehicle provides extensive benefits to people who give over $25,000 a year to charity. With the cost of operating a private foundation falling in recent years, private foundations have become a major trend for affluent donors.
My name is Sean Stannard-Stockton. I am the director of tactical philanthropy for Ensemble Capital Management. I wrote this explanation of private foundations to answer your questions. If you have more questions when you finish reading this, or want help setting up a foundation, you can email us at info@ensemblecapital.com or call 800-708-8445.
Overview
Private foundations are separate, legal entities controlled by a board made up of one or more people. A family foundation is the same as a private foundation, it is simply a term used to refer to a foundation whose board consists of the family members of the person who originally funded the foundation.
When a foundation is funded, the person making the gift receives an income tax deduction in the year they make the gift. The foundation then makes grants to nonprofit organizations.
Costs
Until recently, private foundations were expensive and time consuming to set up and operate. Today, a number of private foundation “administrators” are leveraging internet technology to drastically reduce the time and expense of setting up a foundation. A foundation can now be set up for less than $4,000 in just three days. These administrators handle all of the operations of the foundation including check writing, compliance, record keeping, tax filing and administration. The fees for these services depend on the size of the foundation, but generally come to less than 1% of foundation assets when the foundation is $750,000 or larger. Foundations with lower asset levels generally find that their expenses run from 1-2% of assets. All foundation related fees are paid by the foundation, not by the donor(s). When considering a private foundation, we encourage our clients to look into whether a donor advised fund, which can have lower costs, may fit their needs.
Ensemble clients who chose to outsource foundation administration responsibilities control their foundation through a secure online portal.
Click here to explore a demonstration of the online interface.
Tax Benefits
When making a gift of cash to a private foundation, the donor can take an income tax deduction in the year of the gift. The amount of the deduction claimed can be as much as 30% of the donor’s adjusted gross income (donations in excess of this limit can be carried forward for five years). If the donation is made with appreciated stock that has been owned for at least one year, the income tax deduction will be equal to the fair market value of the stock. The amount of the deduction claimed for a gift of stock can be as much as 20% of the donor’s adjusted gross income (donations in excess of this limit can be carried forward for five years). In addition to the income tax deduction for a gift of stock, the donor avoids paying capital gains tax on any appreciation. Donations of assets other than publicly traded stock are only deductible at the donor’s cost basis, not their fair market value.
Distributions
A foundation is required to distribute at least 5% of its assets each year. While most distributions take the form of grants to domestic nonprofit organizations, distributions can also include; grants to international nonprofits, support for scientific research, emergency and scholarship grants to individuals, loans to nonprofits and purchases of assets such as artwork for public display. Administrative expenses and taxes are counted towards the 5% distribution requirement.
Taxes
Foundations are not tax-free entities. They are subject to a 2% excise tax on their annual income and realized gains. When assets are donated to a foundation, their costs basis comes with them. When they are sold, the gain over the donor’s original cost basis is subject to the 2% excise tax. Under certain circumstances, the excise tax can be reduced to 1% if the foundation increases the amount it distributes to charity.
Family Involvement
The board of a foundation has ultimate control over its actions. They can choose investment managers, grant recipients, hire and fire staff, etc. Many families set up a foundation specifically to involve their family in their grant making. Foundation involvement can be an excellent way to educate younger family members about investments, taxes, responsibility, and family values.
How We Can Help
Ensemble Capital provides charitable planning and investment management services to philanthropic families. We handle account setup, ongoing administration, tax filings and investment management so that our clients can focus on giving. We provide investment management services to both philanthropic entities and private individuals. This dual competency allows us to advise our clients in a holistic way that recognizes the importance of their philanthropic goals within their personal financial plan.
At Ensemble, we never charge a fee for helping people explore their charitable options. We are only paid for managing the investment assets in accounts that we help set up. Because we offer all five of the philanthropic vehicles that donors can launch, we can objectively explain the pros and cons of your various options. If you’d like to discuss your situation with us, please call 800-708-8445 or email us at info@ensemblecapital.com. There is no obligation and no cost to contacting us.