Starting a private family foundation is a great way to involve the entire family in philanthropy while reaping financial benefits. But there are a few things you need to consider before you dive in headfirst creating one.
Compare private family foundations with other types of giving
There are several different options for philanthropic giving; consider the benefits and drawbacks of each.
Donors can claim 60% of adjusted gross income for cash gifts, compared to 30% for private foundations, and 30% for appreciated property, compared to 20% for private foundations. However, public charities must receive ⅓ of their revenue from public sources to maintain such classification. Thus, they are not a good fit if you or your family intends to personally contribute most or all of the funds.
Donor-advised funds are a unique way of giving in which donors contribute to a fund sponsored by a public charity on their behalf. These funds have certain benefits for donors, such as higher tax deductibility limits and savings on administration costs. However, as the name implies, the donor’s role is limited to advisory, and the sponsoring organization makes the final decision as to where the funds go.
Private operating foundations
Private operating foundations are the least common type of private foundations. They are different from other private foundations in that rather than being simply a conduit for giving, they actively run their own charitable programs or services. They are not subject to the rule requiring them to distribute at least 5% of their assets. They are not governed by a benefactor or a corporation; the benefactor or their family may only make up a small part of the board if any at all. Similarly, to donor-advised funds, private operating foundations are not advised if you want control over the disbursement of your donated assets.
Corporate foundations may not be practical for your situation even if you own a company. Typically, other company executives and board members are on the board of a corporate foundation, which is a minus if you want the focus to be on your family.
Benefits of a private family foundation
A private family foundation allows you and your family to give at your own pace and without external interference. Running the foundation can keep your family close while providing employment and teaching skills that will last a lifetime. You may choose to actively organize charitable activities if you want, but most private family foundations do not, instead giving to organizations that do. Provided you are prepared to keep up with recordkeeping and tax requirements, private family foundations are a great way to maintain full control over where your generosity goes.
- Give directly to overseas charitable organizations without a separate 501(c)(3) to act as an intermediary.
- Claim charitable deductions for grants made to other individuals, foreign nonprofit organizations, or non-charitable organizations.
- Donate stock in publicly traded companies and claim a deduction for the full market value of appreciated stock.
- Exemption from Oklahoma corporate income taxes.
Getting started with your private family foundation
If you’ve decided a private family foundation is right for you, here are some questions to ask yourself in the process of starting up.
What will your foundation’s name be?
Most family foundations simply use the family’s name; this can strengthen the family name by associating it with good work. On the other hand, if you want to keep a low profile, you can choose a name with personal meaning, or an unrelated one. Get creative if you want!
What do you want to accomplish with your giving?
What causes do you want to give and which charities do you think can facilitate your goals? It’s okay if you’re not sure yet. You can give to many different causes and see what interests you the most. Many philanthropists discover what they’re passionate about by chance. You don’t need a mission statement right off the bat. The IRS does require a statement outlining your intentions in your incorporating documents, but you can use generic language such as “for religious, scientific, literary, educational or other charitable purposes.”
Who will sit on your board?
Public charities discourage heavy family involvement on the board, stipulating that fewer than 50% of board members may be related by marriage or blood. In contrast, a private family foundation allows the entire board to consist of family members if so desired. That said, it may be a good idea to bring in outsiders, as they may have fresh perspectives and solutions you’re not thinking of. In particular, you should consider bringing in someone with knowledge and experience related to your cause, as well as a financial expert who can guide you through legal requirements.
What is your time frame for giving?
Many foundations continue operating for generations after their founding, but some have a planned time horizon. If you don’t intend to continue your giving for more than a few years, you may want to pre-familiarize yourself with IRS procedures for dissolving the foundation.
IRS requirements for private family foundations and red flags
Running a private family foundation is not all easy work, especially when it comes to IRS regulations, and good intentions alone won’t keep you out of tax trouble.
Private foundations can hire persons that would otherwise be considered disqualified, such as family members. It may be tempting to bring on all of your extended relatives, but each disqualified person’s role must be considered necessary to the foundation. Similarly, you may not provide compensation for any position above a standard rate; violations will result in a 25% penalty of the excess compensation.
You should also be aware of self-dealing laws, which are easier to break than you may think. Any leases or sales between the foundation and a disqualified person, unless the lease is free of charge, is self-dealing, even if the amount charged is below market value. Travel costs are also heavily scrutinized, so you can’t just bring everybody along for a business trip on the foundation’s dime. Costs beyond necessities, such as lodging and food for essential personnel like the foundation manager, are also considered self-dealing.
Trust Company Oklahoma’s Foundation Services
Deciding to dive into philanthropy is exciting, but it can also be intimidating. Our experts at Trust Company Oklahoma are ready to help get you started on this path while navigating legal requirements and growing your family’s vision. Visit our Foundation and Endowment Management 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.