Create your legacy with a private foundation

Making piecemeal cash donations isn’t the best way to take control of your giving. Creating a private foundation could be an effective alternative.

30 Jun 2016

The idea of a private foundation can be extremely appealing, starting with the chance to completely take charge of your charitable giving. “A chief benefit of a private foundation is control,” says Bill Sutton, head of client philanthropy in the U.S. for UBS Financial Services, Inc. “You and your family make the decisions.” Working through a foundation helps you influence the operations of the organizations you support. With the right structure and funding, it can extend your family’s philanthropic impact far beyond your own lifetime. A foundation can engage or even employ your children or other relatives, helping them understand and embrace your philanthropic values.

A foundation won’t fit every family’s needs. It works best if you like to be active in your philanthropy. Each year, for example, you will be required to pay out at least 5% of foundation assets (which can include certain allowed administrative costs). And there are many other rules and regulations governing a foundation’s operation. It’s crucial to know what you’re signing up for. You can discuss your own preferences with your Financial Advisor to get a better sense of whether a private foundation would make sense for you.

Key takeaways

  • A private foundation can expand the impact of your family’s giving.
  • Foundations give you more control over your philanthropy but also involve far greater responsibility than simply donating cash.
  • Donor-advised funds are a popular alternative, and some families use both.
  • If you’re moving ahead with a private foundation, be sure to get expert guidance.

How a private foundation works

A foundation is set up with you and other family members or principals serving as board members or trustees. You decide which charities to support, how you’ll invest foundation assets, and who will run the operations. With control comes responsibility—making sure grant recipients are legitimate, filing annual tax returns and other paperwork, and avoiding transactions and investments that tax laws frown upon. “Some of these rules are surprising,” says Emily Brunner, a UBS Financial Services, Inc. wealth strategist. “You have to be very careful to meet the requirements.” For example, with some exceptions, you can’t lease space in a building you own to your foundation. Moreover, with a private foundation the details of your philanthropy are available for public view. Anyone can look up your filings to see what organizations you support and how much you give.

If you want your foundation to last, your investments need to keep growing while also funding your annual obligations.

Initial funding for your foundation can come in the form of cash or other assets, and the investment is substantial. “You hear lots of answers about how much it takes to create a foundation—from half a million dollars on up—but you may need a higher amount to run it properly,” says Sutton. There are also start-up costs of as much as $25,000—outside the actual funding—for legal and accounting advice, filing for tax-exempt status and other initial steps, according to David Leibell, a senior wealth strategist for UBS. “Plus you’ll need to file an annual information return with the IRS, which can cost from $2,500 to $10,000 a year, depending on the size and scope of the foundation,” Leibell says.

You’ll receive a tax deduction for contributions to your foundation, but the form of the assets affects the size and timing of your deduction. If you want your foundation to last, your investments need to keep growing while also funding your annual obligations. “That 5% distribution plus inflation is a pretty big drag,” says Michael Crook, head of portfolio and planning research in Wealth Management at UBS Financial Services, Inc.

Donor-advised funds vs. foundations
One popular alternative to the private foundation—the donor-advised fund, or DAF—offers many of the desirable attributes of a private foundation but with fewer hassles, lower start-up costs and more privacy. “Anything you do in a donor-advised fund is anonymous,” says Louisa Oakes, Donor Advised Funds Product Manager, UBS client philanthropy services. (For more on the differences between the two, see “Two models for intelligent giving.”)

But a private foundation versus a DAF needn’t be either/or. “Many families have both,” says Sutton. Having both could let you direct particular donated assets into one or the other to get better tax treatment, he suggests, and a foundation that is deliberating about grant recipients can meet its distribution deadline by moving money into the DAF. Or you might establish DAFs for children or grandchildren to let them hone their philanthropic skills before getting involved in your foundation. Speak with your Financial Advisor about what you’d like to accomplish, and you can discuss which options might work best for you.

And if your family is drawn to a private foundation but wants to delegate many of the headaches, partners such as Foundation Source can help. “They have really democratized private foundations,” says Sutton. “They make them as easy to open, fund and operate as donor-advised funds.”

Indeed, that’s the universal recommendation when it comes to private foundations: Get expert guidance. “This is specialty work, and it should be done by specialists,” says Leibell. “But as long as you fund a foundation properly and you stay in compliance, this is a great vehicle that gives you ultimate control of your philanthropy.”