If you want to make a good name for yourself or your business while supporting a cause you’re passionate about, you might think about starting a foundation. A private foundation is a charitable organization typically owned by an individual, family, or business that donates to charitable causes such as health, science, culture, education, and religion. Bill and Melinda Gates, the Coca-Cola Company, Ford, and Wal-Mart’s Walton family are just some of the individuals and corporations that have foundations for their philanthropy. Not bad company to be in! But is there a difference between a foundation and a public charity?
Foundations vs. Charities
The main distinction between a private foundation and a public charity is in how funds are collected. Public charities must receive one-third of their revenue from public sources to maintain such classification. Still, with a foundation, you can keep your giving private, doing so (mostly) at your own pace and in amounts of your choosing. Private foundations generally don’t conduct charitable activities directly but instead donate funds to charities.
What are the benefits of creating a foundation?
A foundation makes it easy to separate donated money from that used for regular operations. Foundations can hold funds and make decisions about their distribution later. Thus, even if yearly contributions to the foundation vary, giving levels can remain the same, and you don’t have to give the same amount you contribute immediately. This is also beneficial for grantees that rely on level funding from year to year.
Public Relations Foundation Benefit
Running a foundation is good for public relations. You will be seen as generous and ethical, and trust in your business will increase. Your name will live on as a positive memory associated with good work.
Foundation Family Benefits
Starting a foundation can also be good for your own family. Running the foundation will require cooperation, providing a way for geographically distant family members to meet and stay in contact regularly. The spirit of philanthropy will establish strong family values and set an example for future generations. Being involved in a foundation also teaches financial and organizational skills that will reap benefits for a lifetime. By contrast, public charities have restrictions on how many members can be related by marriage or blood.
Foundations Can Support Noble Causes
Foundations can promote friendly competition in the service of a noble cause by offering a prize. For example, in 2004, the X-Prize offered $10 million for the first privately developed reusable spacecraft. A prize fund can motivate creativity for solving a problem without forcing donors to pick and choose who to give to.
Are there tax benefits for foundation donors?
Typically, individuals cannot claim charitable deductions for grants made to other individuals, foreign nonprofit organizations, or non-charitable organizations. However, a foundation allows such grants to be made indirectly to bypass these restrictions. An individual can make donations to a tax-deductible foundation, and then the foundation can pass the money on. When individuals give to a foundation, they become trustees and gain the power to retain control of their funds, including the management of funds and their ultimate charitable disposition.
Assets under the control of foundations are typically not subject to estate taxes. There is no capital gain tax on appreciated property donated to a foundation. Stock in publicly traded companies can also be donated, and donors can claim a deduction for the total market value of the appreciated stock. Unlike public charities, private donations can directly give overseas charitable organizations without a 501(c)(3) intermediary.
Foundations are Not Just Charity
In addition to giving, a foundation can also have practical benefits for your business. It can be used for investment, and income from such is exempt from taxation aside from a small excise tax. A foundation can be used to facilitate payment for services rendered and cover costs such as travel. You can also protect your privacy at home by referring solicitations to the foundation.
Why not start a foundation?
However, there are other factors you should consider before starting a foundation. Running a foundation requires resources, such as legal and accounting fees. Foundations are subject to higher scrutiny than public charities, including more stringent recordkeeping standards. Tax filings can be time-consuming – on the higher end, and they may take an entire business day even when done by an expert, which will also cost money. Irresponsible recordkeeping can get your foundation into tax trouble, and these problems can also negate the public goodwill you’ve worked hard to build.
Restrictions on the Foundation’s Finances
Even though you do have flexibility in giving, you can’t hold all your money forever – private foundations must distribute at least 5% of their net investment assets through grants. Investment through foundations is also not unlimited, as they are limited to a 20% stake in a corporation as per Internal Revenue Code section 4943. Additionally, A 1.39% excise tax applies to net income.
Restrictions for Foundation Donors
There are also some restrictions on private foundations in terms of tax deductions. Donors can only claim 30% of adjusted gross income for cash gifts, compared to 60% for public charities.
Donors to foundations can claim just 20% for appreciated property, compared to 30% for public charities. Furthermore, the appreciated property is deductible at a cost basis only, rather than at fair market value. On the other hand, many donors will not approach these limits regardless.
All of these restrictions and complications may seem intimidating. However, hiring a skilled foundation manager can help you wade through confusing financial waters. A foundation manager may be a trustee and may also have the title of officer or director. On a day-to-day basis, a foundation manager performs tasks such as maintaining incoming donations and outgoing grants, identifying new opportunities for giving, and supervising a public relations strategy.
The foundation manager has a role akin to a CEO, with final authority over the foundation’s finances. They have the final say over major decisions and final responsibility for all actions or failures to act. The manager is above accountants, lawyers, and advisors and is ultimately responsible for their work and typically involved in their hiring.
The foundation manager must be able to establish positive relations with prospective donors and gain their trust. A foundation manager must be not only knowledgeable and competent but honest and ethical as well. Typical qualifications include a bachelor’s degree (at a minimum; some foundations will want a master’s) in a financial field and five to ten years of professional fundraising experience.
Foundation Management Services
If, after hearing everything, you still want to start a foundation but don’t know where to begin, you’re not alone. Many companies have services specially designed for foundation management, helping clients with tax and legal advice and assisting with long-term administration. Our professionals here at Trust Company Oklahoma will work to help realize your vision and ensure that your generosity goes as far as you want it to. Visit our Foundation and Endowment page to learn more about what we can do, and call our Oklahoma City office at (405)840-8401 or our Tulsa office at (918)744-0553.