Creating a Private Foundation
Because a private foundation is a nonprofit corporation or a charitable trust created by the donor, you retain personal control and flexibility over its giving programs. You can appoint yourself, as well as other family members, to the governing board. A private foundation’s grantmaking can be broad in purpose, allowing support to a variety of issues. Or, if the foundation trustees so desire, they can direct all grantmaking toward one specific issue or organization.
Since private foundations are tax-exempt organizations, you can enjoy certain tax advantages. Tax deductions are available of up to 30% of annual adjusted gross income for cash donations. Gifts made in one year which exceed the limitation can be carried forward for purposes of deduction for five years.
Another important benefit is that your giving is perpetuated for as long as your foundation exists. This advantage is made possible because the funds are invested and income is paid out annually in grants. The principal can increase with inflation if wisely invested, and this approach can ensure the foundation’s continuation and growth. Private foundations must pay out funds generally equal to 5% of their assets—each year—and must pay a 1-to-2% tax on net investment income.
In addition to the private grantmaking, endowed foundation, there are two other options that offer more favorable tax deductions:
- The pass-through foundation is a private grantmaking organization that distributes all of the contributions it receives each year (not just 5% of assets). The pass-through election may be made or revoked on a year-to-year basis.
- A private operating foundation uses the bulk of its income to actively direct staff and run a charitable program(s) or service(s). Examples include the operation of a museum, library, or research facility.
Contributing to Community Foundation Funds
Michigan is fortunate to have a network of community foundations and affiliate funds that cover the entire state. Community foundations are local charitable entities that may administer a number of endowed funds in four basic categories: unrestricted, field of interest, donor-advised, or designated.
Income from the community foundation’s discretionary funds is spent primarily for local purposes, to solve community or regional problems, and improve the lives of people in its geographic service area. Here are some ways you can give to a community foundation:
- Make an unrestricted gift, the income from which is used where the foundation’s board of trustees deems it is most needed.
- Support a field of interest fund (such as the arts, or education, or the environment) or designate a specific charitable organization to benefit, such as the local library.
- Create a donor-advised fund with your local community foundation. Either named or anonymous, a donor-advised fund allows you to receive your charitable deduction in the year the fund is established and you may suggest distributions at any time in the future. While the final decision on grant distributions rests with the board of trustees of the community foundation, your fund is not subject to the excise tax and payout requirements of a private foundation.
Many donors use advised funds, as well as designated funds to support their favorite charitable causes. While the community foundation will charge a small annual fee for administering your fund, research indicates that, depending on asset size, it is still less expensive than the annual operating expenses of a private foundation. While you have the enjoyment of being a grantmaker, the community foundation handles the administration.
Corporate Foundations & Giving Programs
Many corporations have an annual giving program to make grants, funded as part of each year’s operating budget for the parent corporation. A corporate giving program has no independent endowment, its budget is administered by corporate staff, and it is not subject to the rules and regulations of a private foundation. Corporate leaders who choose to take the next step by creating a corporate foundation as an independent tax-exempt private foundation or creating a fund at a community foundation usually do so for the following reasons:
- To preserve the company’s charitable giving during lean economic times
- To preserve the company’s name in an era of mergers and acquisitions and
- To enjoy tax advantages permitted for contributions to charitable foundations.
The corporate foundation is usually started with a large single gift that can become the endowment, which may be added to on an annual basis as—and if—profits allow. The foundation’s officers are usually the company owners and key executives. The corporate foundation is subject to the same rules and regulations applicable to other private foundations. Because the priority is to serve those communities where company employees and facilities are located, corporate foundations and giving programs often offer to match employee gifts of cash, make “in-kind” gifts of products to charities and and/or organize workplace volunteer efforts for the good of the community. This activity is often referred to as corporate social responsibility.