Have you always wanted to leave something behind that will stand as your legacy and remain long after you have gone? Maybe you have a passion concerning a specific non-profit organization that you would like donate to on a regular basis. Maybe others have asked you set something in motion and they would like to contribute to your philanthropic cause? These are a few very interesting reasons to begin a private foundation.
According to the Association of Small Foundations (one of my favorite resources on the subject)
The primary Reasons for establishing a private foundation
(Includes foundations formed in 2000 or later)
- General philanthropic impulse 53%
- Estate or tax planning 36%
- To honor or build a legacy for a family or an individual 34%
- Passion for a particular cause 21%
- To strengthen the family 13%
- Other 8%
Tax Items to be Aware
The Internal Revenue Service classifies every exempt charitable organization as either a public charity or a private foundation. There are three different types of foundations: standard private, private operating, and pass-through or conduit. Different regulations apply to each type.
For the context of this discussion, we are focusing on standard private foundations, which are the most commonly set up by individuals to achieve the purposes we have discussed above.
30% AGI (adjusted gross income) deductible each year from a federal tax standpoint, as an example, if a tax payer has an adjusted gross income of $500k, a $150k contribution would be fully deductible from a Federal Income Tax standpoint in the year these earnings were made.
Costs of Set up and Administration
Recently (in the last few weeks) I have assisted in the formation of a foundation and the following expenses are what we have, or expect, to incur.
- Formation and filing, including all legal documents and grantor assisted documents approximately $5000
- Annual expected tax return cost $1500
Many of these expenses are government related and may change without notice, but these are our costs as of this filing date.
How much money does it take to form a Private Foundation?
Often times when a Foundation is mentioned thoughts of Bill and Melinda Gates, Ford’s, or Walton’s come to mind. Given the expenses mentioned earlier and the costs of set up, a Private foundation does not have to be as large as many may think. While the most famous foundations have very large asset sizes, according to the Council on Foundations, another terrific reference for foundations, in 2006 over 60% of Private Family Foundations had between $1 and $1 million dollars in total assets.
In our estimation, small initial contributions with the goal of hitting the $100k mark in the first few years will mitigate the ongoing expenses and provide for lesser expenses on a percentage basis as continued contributions are made in the future.
A Case Study Example for a Private Foundation:
Several early generations of the Jones family have always had aspirations for giving to various charities and regularly give each year to their church, and several causes which are important to the family. A younger Jones family generation, who also has philanthropic interests as well as goals of leaving a legacy when they are gone, have a liquidity event that greatly increases their net worth and income.
During the year of the liquidity event, the Jones Jr. family members found, establish, and contribute to their newly formed foundation. Since the year of contribution was a high income year for the younger Jones JR family, contributions made to their newly formed foundation greatly offset their higher tax burden in the year of liquidity. The Jones Jr. family intend on making contributions for years to come, but possibly not to the same level as the original year.
The elder Jones family members are happy as they now have a fluid entity that they may contribute all at once and with their membership on the board, have a say in the direction of the annual donations.
In the future, the younger Jones family intend on appointments of their children to the board in order to help them learn the spirit of their parents, with the eventual full control and responsibility to remain for many generations to come.
The facts and figures represented in this article are general in nature, subject to change, and your situation may differ, please consult your legal and tax experts before commencing your Private Foundation.
Have a Great Day!