Making the Most of Your Charitable Giving in Colorado
A private foundation is a non-governmental, nonprofit organization having a principal fund of its own, managed by its own trustees or directors, and established to maintain or aid social, educational, charitable, religious or other activities serving the common welfare. A private foundation may serve as a private, family controlled receptacle for charitable contributions by family members, trusts established for their benefit (including charitable remainder trusts and charitable lead trusts) or family business entities.
A private foundation is established as a nonprofit corporation or trust under state law and obtains tax-exempt status for federal income tax purposes by filing an exemption application with the Internal Revenue Service. In addition, a private foundation may be required to obtain additional exemptions from state and local income and/or property taxes. A private foundation operates under the scrutiny of the Internal Revenue Service and the Attorney General of the state in which the private foundation is organized and operates.
There are several types of private foundations. The most common variety of private foundation is a non-operating private foundation, which serves to make grants to other nonprofit charitable organizations (typically established public charities). The basic role of the non-operating private foundation is to receive and hold funds as an endowment, and to give its income and possibly a portion of its corpus to other entities that operate for charitable purposes. The scope of permissible recipients includes all types of charitable organizations, ranging from large, established public charities such as United Way and the American Heart Association, to churches, colleges, universities and hospitals, to smaller local charitable organizations. A non-operating private foundation may make distributions for use in foreign countries, though such distributions are typically made to the U.S. affiliate of a foreign charitable organization.
The private operating foundation is a type of private foundation which directly carries on an exempt activity, and which uses a specified portion of its assets and/or income for its exempt purpose. Examples of private operating foundations include certain museums, cultural centers and educational institutions. Private operating foundations generally do not differ significantly in their activities from charitable institutions that constitute public charities for income tax purposes. The significant difference between a private operating foundation and a public charity is the level of support which a public charity receives from members of the general public (typically 1/3 or more of the organization's support), whereas the private operating foundation generally receives its support from the members of one family and/or related entities established by or for the members of that family.
There are significant income, estate and gift tax benefits which flow from the establishment and funding of a private foundation, and the use of a private foundation has substantial estate and gift tax benefits to donors. Contributions to private foundations (both operating and non-operating foundations) are deductible for federal gift and estate tax purposes. The private foundation may be funded during the donor's lifetime or may receive the bulk of its funding from distributions from the donor's revocable living trust at the donor's death. In addition, the private foundation may serve as the charitable receptacle for distributions from charitable remainder trusts and/or charitable lead trusts established by the donor.
Significantly, the private foundation may provide a tremendous opportunity for donors to educate family members as to the donors' philanthropic goals, and may also provide younger family members with a sense of responsibility and stewardship of family wealth. The private foundation may be structured to limit the scope of its charitable activities, by defining the permissible donees for charitable distributions, or may be structured to allow for unlimited charitable activities. Moreover, the private foundation may employ family members (subject to limitations as to reasonable compensation) to coordinate the foundation's activities for generations to come.