The decision to set up a private foundation or utilize a local community foundation is a classic question. Both are tools for strategic giving, but the differences are extensive – from tax issues and yearly payouts to operations and cost. Most experts indicate that you shouldn't begin to think about starting a private foundation with less than a $5 million commitment.
Creating a Donor Advised Fund with the Community Foundation is an easy, low-cost alternative to forming and administering a private foundation. This option comes with many advantages, including a lower cost and administrative burden - while still allowing a donor to take an active role in grantmaking. For a more in-depth comparison, click here.
Here are some advantages to working with a community foundation:
- Convenience - Establishing a fund is quick and easy and can be accomplished in a matter of days. Private foundation establishment can take months at significant expense.
- Deductibility - A community foundation is a public charity and offers donors the most favorable tax treatment.
- Payout - As a publicly supported charity, the Community Foundation is not subject to the minimum 5% distribution rule that applies to private foundations.
- Administration - The Community Foundation has a professional staff and access to resources for quick answers to initial questions. The Foundation includes all component funds in its audit and tax filings. A private foundation must secure staff, services and prepare tax reporting on its own.
- Anonymity - Many donors are surprised to learn their donations, grants, program expenses and other financial information with a private foundation are public information. The Community Foundation is not required to publish its donor list. While we do list grants in our tax information, we do not indicate which fund was the source of each grant. In addition, some donors prefer to make all or some of their gifts anonymously, which we often do.
- Procedures and Cost - Private foundations must incorporate and apply to the IRS for tax-exempt status with legal and accounting fees to establish a foundation. The Community Foundation does not charge start-up fees when setting up a new endowment fund. We charge an annual administrative fee of 1.75% on donor advised funds, significantly lower than operating a private foundation.
- Tax Treatment - With a private foundation, current year tax benefits are limited to 30% of adjusted gross income for cash gifts and 20% of adjusted gross income for appreciated property gifts. The Community Foundation's current tax benefits are 50% of adjusted gross income for cash gifts and 30% of adjusted gross income for appreciated property gifts.
- Grant Management - The Community Foundation performs due diligence on each organization prior to distributing funds, making a responsible gift to ensure the best use of funds.
- Liability and Insurance - With a private foundation, directors and officers liability insurance, employee bonding, and office insurance must be separately purchased. The Community Foundation carries full liability insurance.
Giving should be rewarding, satisfying and fun, but it can also become burdensome. Decisions about who will run the foundation, its grantmaking priorities and strategies, and the details of the grantmaking process may be more work than anticipated. If you are a professional advisor with a client that currently has a private foundation and has realized it is not as easy or rewarding as it once seemed, we can help transfer private foundation assets to a fund at the Community Foundation. Please contact us if you are interested in our staff assisting you with this process.