Private Foundations Can Work For Some

The Bill & Melinda Gates Foundation is the largest and arguably the best-known private foundation in the United States. While not everyone who creates a successful foundation will be like the Gateses, the couple can be a useful model when deciding whether a private foundation meets your charitable goals. If your aims and resources don’t align with such a project, an alternative may be better.

In the United States, a private foundation is defined as a not-for-profit entity that is not a public charity, as defined by Section 501(c)(3) of the Internal Revenue Code. In practice, this means a private foundation must be funded and controlled by a single individual, family or business, and must be operated exclusively for religious, scientific, literary or educational purposes; for public safety testing; or for the prevention of cruelty to animals or children. Many private foundations support their causes by making grants to organizations invested in those causes.

Individuals, families or businesses may have a variety of reasons for creating private foundations. Foundations offer donors a great deal of control over how contributions are spent, allowing them to steer gifts toward ends they value. Private foundations may also offer prestige and legacy to the founders and to their descendants. Many foundations support public broadcasting, fund building projects at universities or underwrite other educational or arts projects that bear the foundations’ names or acknowledge their generosity.

For families, private foundations can offer useful employment and transmit values from older generations to younger ones. Parents may wish to involve their children in philanthropic decisions or to provide long-term careers operating the foundation for children who many not otherwise need to work. Also, some foundations offer greater visibility and prestige for those who are involved at high levels.

Private foundations also possess certain financial planning features that may be useful for donors. A donor can use a foundation to take an immediate tax deduction for a charitable contribution, even if the foundation does not use the contribution for a grant until some future date. This can allow a donor some flexibility in the timing of a gift.

Creating A Private Foundation

To create a private foundation, you must establish a separate legal entity, either a corporation or a charitable trust. If this sounds complex, it is. Professional assistance is nearly always essential. A team that includes legal and financial advisers will help ensure that your foundation has a solid underpinning. However, here are the basic steps.

Should you decide to create a corporation, you must file articles of incorporation with your organization’s state of domicile. Your foundation will need bylaws, which must be drafted and adopted. You will also need to appoint a board of directors, and officers. Note that some states have regulations specific to the involvement of “interested directors” – people who are compensated for their services or are family members. For example, in California, no more than 49 percent of the corporation’s governing body may be composed of interested directors. If you plan to use your foundation to give status to family members, be careful not to run afoul of these sorts of rules. Typically, corporations have less flexible decision-making processes than do charitable trusts. Corporations will generally set up annual meetings, notices of meetings and structured voting processes.

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