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Private Foundation Options

Article Index
Private Foundation Options
10 Reasons to Set Up a Fund
Transferring a Private Foundation
The Donor Advised Fund Option
The Supporting Organization Option
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There are advantages and disadvantages to each private foundation approach. Our desire is to help you find the solution that works best for your client.


The following chart provides a detailed look at the differences between a private foundation and a community foundation. The first section compares the two options as charitable giving vehicles. The second section looks at these options from an investment standpoint.

Feel free to share this information with your clients as they explore all their giving options. Or call us in for further consultation, if you wish.

Community Foundation Named Charitable Funds and Private Non-operating Foundations


Community Foundation

Private Foundation

IRS charitable status

501(c)(3) & 509(a)(1)
(public charity)

 501(c)(3)
(private foundation)

Governing body

1. Advisory Committee
Advisor may be establisher or may be committee of family members and/or others.

Successive generations may participate in future giving.


2. Community Foundation must have final approval for all grants and administrative matters.

 Governing body may consist of donor and related persons.

Governing body must approve all grants and administrative matters.

Tax treatment of cash gifts

Deductible up to 50 percent of adjusted gross income (AGI).

Deductible up to 30 percent of AGI.
Tax treatment of gifts of appreciated publicly-traded securities

Full market value deductible up to 30 percent of AGI.

Full market value deductible up to 20 percent of AGI.

Tax treatment of closely held stock or real estate

Full market value deductible up to 30 percent of AGI or cost basis up to 50 percent of AGI.

Deduction limited to donor's cost basis, up to 20 percent of AGI.

Deduction carry-over available

Five additional years

Five additional years

Ease of establishment, incorporation and tax exemption

One signed document

Automatically covered by the Community Foundation's tax exempt status

Corporation or trust required


Must apply to IRS for tax-exempt status using Form 1023. (IRS may take six months or longer to process)
Excise tax on investment income and net realized capital gains None Generally 2 percent; may be reduced to 1 percent under special circumstances.

Self dealing rules

 Not applicable
 Strict prohibition under IRC Section 4941.

Minimum payout requirements

 None (can accumulate toward a sizable project or grant with no required payout)

A Community Foundation fund has the flexibility to hold low yield property.

 Yes (minimum 5% of average asset value each year under IRC Section 4942)

A private foundation must meet the minimum distribution rules whether or not the foundation's investments earn that amount.

Restriction on private investment

 Yes Yes (in addition, you cannot engage in acts that may violate strict self dealing rules that apply only to private foundations)
Restriction on holding interests in business enterprises No

Yes
Application of expenditure responsibility procedures for grants to organizations and programs that are not public charities

No

 Yes (under IRC Section 4945 - taxable expenditure retax for failure to make "expenditure responsibility" investigations)
Possibility of advisory role for donor and family in grantmaking

Yes

Yes
Separate annual IRS tax return required No

Yes

Privacy

 Yes. Individual donors' fund assets size, gifts and grantmaking are kept private and confidential. No public disclosure of individual grants or donations is required. Donors are generally recognized for grants disbursed, but grants may be made anonymously. If a donor wishes, the Community Foundation can serve as the buffer between donors and grant-seekers.

No (IRS Form 990-PF which is open to public inspection)
Private foundations are required to file detailed tax returns on grants issued, investment fees, trustee fees, staff salaries, asset size, etc. and then publish a notice to the public that the tax return is available for public viewing. These are public records and are often compiled into grant-seeker directories.
Investment, accounting, audit and tax returns
 The Foundation handles all investments and accounting, files annual tax return and provides and annual, independent audit. Trustees must perform, contract or hire staff for these services.

General administration

 Community Foundation handles all financial and administrative management. Trustees must perform, contract or hire staff for these services.

Grant administration

If donor wishes, the Community Foundation can identify potential recipients, investigate applicants, make grant payments and monitor performance.

Trustees must perform, contract or hire staff for these services.

Liability and insurance

Advisors to funds are covered by Community Foundation's liability and office insurance policies. Fundraising events and other activities will require insurance.

Any Directors and Officers liability insurance, employee bonding, and office insurance must be separately purchased.

If you need more information, have questions or wish to schedule a meeting, please Contact Us for more information.



Here are ten practical reasons that outline why establishing a community foundation charitable fund might make more sense than creating a private foundation:


  • A fund is easy and inexpensive to establish. A private foundation requires a donor to create a new organization, apply for tax-exempt status, pay filing fees and incur legal and accounting expenses.
  • A gift of cash to a charitable fund allows a deduction of up to 50% of a donor's Adjusted Gross Income (AGI). A gift of cash to a private foundation allows a donor to deduct up to 30% of AGI.
  • By creating a charitable fund, a donor may deduct gifts of closely held long-term appreciated stock at its fair market value, up to 30% of AGI. If the same gift is given to a private foundation, deductibility may be limited to its cost basis up to 20% of AGI.
  • No tax is imposed on the investment income of a charitable fund because it is a component of a public charity. A private foundation pays up to 2% federal excise tax on its investment income and net realized capital gain.
  • A community foundation donor may remain anonymous. A private foundation must make available to the public the name and address of any substantial contributor.
  • There are no minimum distribution requirements for a charitable fund at a community foundation. A private foundation must annually distribute at least 5% of its net investment assets, regardless of whether the amount is actually earned.
  • There are fewer restrictions on a charitable fund. For private foundations, however, there are strict regulations regarding self-dealing between the foundation and those who manage, control, or contribute to it and persons or corporations closely related to them. For example, a private foundation, along with its donor and other "disqualified persons" (including members of the board and staff), may not hold more than 20% of a related corporation's voting stock.
  • There are fewer investment restrictions on a community foundation's funds. A private foundation may not make certain types of investments. For example, a community foundation may hold more than a 20% ownership in a particular corporation, but private foundations may not.
  • There are fewer IRS reporting requirements on community foundation grants and funds, and requirements that do exist are handled by the foundation's staff at no extra charge to individual donors.
  • Charitable gifts to a community foundation fund are almost always considered "public support," thus helping the recipient charity retain its public charity status. A private foundation grant is usually not considered "public support" in its entirety and, thus, may not be as helpful to the recipient charity in retaining its public charity status.

We are available to help you and your clients discuss and consider these options. Please Contact Us for more information.




Some of your clients may have an existing private foundation. In this case, they may find that there are several benefits to transferring it to an advised fund with the community foundation. Through a simple transfer process, your client may be able to avoid some of the hassles (and costs) of private foundation management.


There are two options to consider: the donor advised fund option and the supporting organization option. Each approach allows your clients to remain involved in grant making, if that is their desire. At the same time they will be able to ensure that their intent, name and pattern of charitable giving are maintained—in perpetuity if they wish.


We are ready to guide you and your client through the private foundation transfer process. Please Contact Us for more information.




Assets of a private foundation may be used to establish a donor advised fund, unrestricted fund, field of interest fund, scholarship fund or designated fund. Depending on the type of fund that is established, the private foundation's Board of Directors often stays involved in setting grant-making priorities, advising on grant awards and assessing grant success.

We are glad to help you and your client explore this option in more detail. If you have questions or want to schedule a meeting, please Contact Us for more information.




Generally, it is possible for a private foundation with $5 million in assets, or the potential to reach $5 million in the future, to become a supporting organization of a community foundation. Besides easing the administrative and cost burdens of managing a private foundation, transferring it to a community foundation permits the private foundation to take advantage of many aspects of our public charity status.


Section 507 of the Internal Revenue Code permits termination of a private foundation in either trust or corporate form with distribution of its assets to a public charity. The two primary requirements for the termination of a private foundation are that the private foundation must distribute all of its net assets to one or more tax-exempt organizations and that each organization has been in existence for a continuous period of at least five years preceding the distribution. Our community foundation fulfills both of these requirements and the private foundation's assets typically form a permanent donor advised fund under a similar name.


The supporting organization option requires careful consideration by your client and our Board of Directors. For further information on this option, or to discuss a particular client's needs, please Contact Us for more information.