What Is a Private Foundation?

A private foundation is a nonprofit organization created with funds from a single donation by an individual, family, or business. Trustees or directors manage and disburse the funds according to the mission communicated by the endowment's founders. Private foundations don't raise money through public fundraising but rely on the investment income from their endowment to fund their activities. This is what makes them tax-exempt although they don't qualify as public charities as defined by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS).

How a Private Foundation Works

Private foundations are classified as 澳洲幸运5官方开奖结果体彩网:501(c)(3) organizations, which are tax-exempt as are donations to them. They generally fit into two categories:

• Private operating foundations: These directly run the charitable activities or organizations that they fund with their investment income. Tax regulations require that they must spend either at least 85% of their adjusted net income or their minimum investment return, whichever is less, on their activities annually.
• Private nonoperating foundations: These disburse funds to other charitable organizations whose goals match their own. In this case, the IRS requires that the foundation disburse an amount "equal to the foundation’s minimum investment return with certain adjustments.” While they can also operate programs, that isn't their main function. This is the most common type of private foundation.

There is a limit on the business holdings of a private foundation, which is generally “up to 20% of the voting stock of a corporation, reduced by the percentage of voting stock actually or constructively owned by disqualified persons.” Also, the investments made by private foundations must not put at risk the execution of the organization’s exempt purpose.

Types of Private Foundations

There are many kinds of IRS-approved private foundations. Each differs in how it is governed and funded. The various kinds are not neces𓄧sarily legal classificat𒁏ions.

• Family foundation: This is created by family members who operate and govern the organization for a philanthropic cause(s). An example is the Walton Family Foundation, which works in three areas: “strengthening the connections between education and lifelong opportunity, protecting rivers, oceans and the communities they support and advancing our home region of Northwest Arkansas and the Arkansas-Mississippi Delta."
• International foundation: This is a private foundation, usually based outside the U.S., that makes grants and engages in cross-border philanthropic endeavors. An example is the 澳洲幸运5官方开奖结果体彩网:Mastercard Foundation, which works largely in its home base of Canada and in Africa “to advance education and financial inclusion in 74 countries, primarily in Africa, to catalyze prosperity for young Africans and to support Indigenous youth in Canada."
• Corporate foundation: This is an organization created and supported by a 澳洲幸运5官方开奖结果体彩网:corporation as a separate legal entity, though tied to the company, that is designed to give back to society, especially local communities. An example is the Prudential Foundation, an arm of the life insurance company, which makes “grants to nonprofit organizations that help close the financial divide by creating inclusive workplaces and communities and accelerating economic mobility for all,” including in its home base of Newark, New Jersey.

Instead of forming a corporate foundation, some companies choose to set up a 澳洲幸运5官方开奖结果体彩网:corporate giving program, which may dole out money in cash or grants to chari⭕table organizations.

Private Foundations and the IRS

If any organization qualifies as 501(c)(3), it is by default considered to be a private foundation by regulators unless it is better classified under a different category that is explicitly excluded from being called a private foundation. Examples of excluded entities include universities and hospitals.

Although they are exempt from income taxes, most domestic private foundations are subject to an 澳洲幸运5官方开奖结果体彩网:excise tax on their 澳洲幸运5官方开奖结果体彩网:net investment income. There may also be taxes for some foreign private foundations that draw gross investment income from U.S. sources.

The IRS has other rules regarding private foundations. For instance, there are restrictions barring 澳洲幸运5官方开奖结果体彩网:self-dealing or acting for personal benefit rather than for the interests of 澳洲幸运5官方开奖结果体彩网:beneficiaries, between the foundation and substantial contributors. In other words, the administrators of a foundation cannot use their positions to enrich themselves at the expense of the foundation’s beneficiaries.

Tax Savings

There ar⭕e three main tax-saving advanta♍ges available to donors to private foundations:

• Estate tax: Money donated to a private foundation is not included in a donor’s estate, thus making any donated assets free from state or federal estate taxes. Wealthy individuals can fulfill their philanthropic desires while saving money on estate taxes.
• Income tax: Any individual who donates to a private foundation receives an income tax deduction for the amount that they contribute, allowable up to 30% of the donor’s 澳洲幸运5官方开奖结果体彩网:adjusted gross income (AGI).
• Capital gains tax: Donors may sidestep 澳洲幸运5官方开奖结果体彩网:capital gains taxes if they give highly appreciated assets, such as stock or real estate, instead of cash to a private foundation.
  

Adv♐💖antages and Disadvantages of Private Foundations

Advantages

澳洲幸运5官方开奖结果体彩网: The benefits of private foun🌌dations ♔include:

• Greater control over charitable giving
• Greater consistency in charitable giving over time, as the foundation can last in perpetuity
• Creating a visible and lasting legacy for the founding individual, family, or corporation
• Eligibility for a variety of tax savings
• No need to constantly seek donations from the public
  

Disadvantages

Th⛄🤪e disadvantages of private foundations include:

• Costly to start in terms of both money and time
• Onerous regulatory and record-keeping requirements
• Lower deductibility limits on donations than for public charities (30% of adjusted gross income for cash gifts and 20% for gifts of appreciated assets vs. 60% and 30%, respectively)
• Less favorable treatment of gifts of appreciated property than for public charities (valued at cost basis as opposed to 澳洲幸运5官方开奖结果体彩网:fair market value)
• Excise taxes levied on excess business holdings
  

Private Foundations vs. Public Charities

Both private foundations and public charities 澳洲幸运5官方开奖结果体彩网:do 🐼good works, but they operate in different ways, and each has its own set of tax laws. A public charity usually raises its funds t꧑hroug🔯h donations from the public, while a private foundation is funded by investing its endowment, sometimes including new contributions from a limited group of donors.

Federal law requires a public charity to either receive one-third or more of its assets from contributions from the general public or meet the 10% facts and circumstances test given by the IRS.

Example of a Private Foundation

The largest private foundation in the United States is the Bill & Melinda Gates Foundation, which had an endowment of $77.2 billion as of the end of 2024. The foundation budgeted $8.3 billion in direct grantee support for 2023 alone.

This foundation's goals are to expand educational opportunities and access to information technology in the U.S., reduce extreme poverty, and enhance 澳洲幸运5官方开奖结果体彩网:healthcare worldwide.

Some of its activities include bringing access to financial services, such as savings accounts and insurance, to people living in extreme poverty around the world, as well as funding improved sanitation, agricultural development, and other important initiatives in the developing world.

The Bottom Line

For a wealthy family or a company, creating a foundation for a good cause is a way to give back to the community. Because they are tax-exempt, there is a complex process for setting them up and operating them properly. However, they have m෴any benefits beyond the satisfaction of doing good for others. These include a variety of tax benefits for wealthy families.