A Private Family Foundation represents a specific type of private foundation established by a family. These foundations are funded using the family’s assets and are frequently managed by family members. These members often actively participate in the foundation’s charitable grantmaking activities. A significant advantage of a private family foundation is its longevity and adaptability; it can exist for as long as the family intends to pursue its philanthropic goals and can evolve to reflect changes in family dynamics and charitable priorities.
Creating a private family foundation is a powerful method for families to formalize their giving and cultivate a lasting philanthropic legacy. While these foundations can offer certain income tax and estate tax advantages, it’s important to note that alternative charitable giving vehicles, such as donor-advised funds, might provide even greater benefits in some cases.
How a Private Family Foundation Operates
It’s crucial to understand that there are no distinct legal regulations specifically for private family foundations. They function as a subset of private foundations, governed and funded by family members. As such, they are subject to all the same IRS guidelines and requirements applicable to all private foundations.
According to the Council on Foundations, approximately half of all private foundations in the United States are family foundations. Typically, family members serve on the foundation’s board, playing a key role in deciding how the foundation’s assets are deployed to achieve its mission. This is primarily accomplished through grants awarded to various charities or individuals. Like all private foundations, family foundations are mandated to distribute at least five percent of their assets annually. A key aspect of transparency is that the grants made by a private family foundation are publicly accessible. This public record can be invaluable for nonprofit organizations and other donors seeking to understand the foundation’s philanthropic interests and the types of causes and organizations it supports.
Funding and Management: Private family foundations can be established and sustained through a variety of assets, including cash, publicly traded securities, private stock, real estate, and other family-controlled holdings. The management of the foundation can be handled directly by the family or outsourced to a professional manager, who may be designated as an operating partner or chief operations officer. To ensure smooth operation and family involvement, a family governance system is often developed. This system clarifies roles in philanthropic discussions, sets expectations for time commitments from family members, establishes grant recommendation guidelines, outlines procedures for incorporating new philanthropic goals, and includes educational initiatives to engage younger family members in the foundation’s mission as they mature.
Setting Up a Foundation: The process of establishing and administering a private family foundation, like any private foundation, can be intricate. It’s essential to seek guidance from a Certified Public Accountant (CPA) or a lawyer to navigate the setup process. This includes drafting and filing articles of incorporation, defining the mission statement, preparing other necessary legal documents, and obtaining the foundation’s tax identification number from the IRS. Furthermore, family foundations must adhere to all ongoing administrative requirements that apply to private foundations generally.
Private Family Foundations vs. Donor-Advised Funds
A popular and often simpler alternative to a private family foundation is a donor-advised fund (DAF), such as a Giving Account offered by Fidelity Charitable. DAFs also provide families with a structured approach to charitable giving but often come with more favorable tax benefits and reduced administrative complexities.
A donor-advised fund operates similarly to a charitable investment account exclusively for supporting charitable organizations. It can be named after the family or any other chosen name. After making an irrevocable contribution to a DAF, the donating family can recommend grants to IRS-qualified public charities over time. Unlike private foundations, DAFs do not have mandatory annual disbursement requirements.
The sponsoring charity of the donor-advised fund assumes responsibility for fund management and all necessary record-keeping. Organizations like Fidelity Charitable offer user-friendly web-based platforms that simplify the process for families to manage their giving and track their philanthropic impact. For families who value anonymity in their giving, a donor-advised fund provides this option, unlike private foundations where grant information is publicly reported.
For donors making substantial philanthropic commitments, some DAF sponsors offer enhanced support and services. Fidelity Charitable’s Private Donor Group, for example, provides members with access to a dedicated philanthropic strategist. These strategists can assist families in developing mission statements and implementing effective grantmaking strategies.
Comparing a donor-advised fund to a private family foundation reveals further advantages, particularly in terms of tax benefits. Contributions to a DAF are eligible for an immediate tax deduction in the current tax year. The deduction limit for cash contributions to a DAF can be up to 60% of the donor’s adjusted gross income (AGI), and for long-term appreciated publicly traded securities, it’s up to 30% of AGI. In contrast, deductions for contributions to a private foundation are capped at 30% and 20% of AGI for the same asset types, respectively. Moreover, investment income within a DAF is not subject to tax, whereas private foundations, while exempt from federal income tax, are subject to an excise tax on their investment income, currently at a rate of 1.39%.
Increasingly, families are choosing to transition existing private foundations into donor-advised funds, often with the guidance of legal and tax advisors. Donor-advised funds also present a viable option for families who wish to establish a tradition of family giving but may not possess the resources necessary to create and maintain a private family foundation.
