How to Start a Charitable Foundation

A private foundation is an organization formed and operated to fund charitable activities through grants and other gifts under Internal Revenue Code Section 501(c)(3), but that does not fall within the category of a public charity.

Public charities uses publicly collected funds to support their initiatives directly. In contrast, a private charitable foundation is generally created by a single benefactor, usually an individual or business.

Starting a Private Family Foundation

People who are charitably inclined may appreciate the idea of establishing a private charitable foundation that will continue after they pass on. The foundation can be created while you are living, or it can be established after your death.

To qualify, a percentage of the foundation’s assets must be distributed to charity each year. You can name whomever you wish to run the foundation, including your children. The foundation can also pay them a reasonable salary.

You can be very specific about which charities you want to support, or you can leave that up to the trustees of the foundation to decide (within Internal Revenue Service (IRS) guidelines, of course).

Tax Benefits

The tax benefits of setting up your own foundation can be substantial. You can save estate, capital gains, and ordinary income taxes.

Estate Tax Exemption

The assets you give to the foundation will be removed from your taxable estate. So, for example, if you give your entire estate to the foundation (or the entire amount over the estate tax exemption), your estate will pay no estate taxes.

Capital Gains Tax

There will be no capital gains tax when the assets are sold by the foundation, which provides a benefit with appreciated assets.

Income Tax Deduction Based on Adjusted Gross Income

If you donate certain assets to a private foundation, you can get a charitable income tax deduction for the full fair market value up to a certain percentage of your adjusted gross income.

Charitable deductions for contributions to foundations are limited to 30 percent of adjusted gross income for cash and 20 percent of adjusted gross income for long-term publicly traded appreciated securities.

So, instead of giving all that tax money to Uncle Sam, you can set up your own charitable foundation, donate your assets to it, control how the money is spent, and provide a benefit to others.

How to Set Up a Foundation: Speak With an Estate Planning Attorney

The rules and restrictions in this area are complex and can have significant legal and tax consequences. Be sure to consult with an experienced estate planning attorney regarding the formation and governance of private charitable foundations.

Visit the IRS website to learn about the ins and outs of private foundations. This dedicated webpage provides information on the life cycle of a private foundation, exemption requirements, required tax form filings, and more.