Private Foundation

A private foundation is a tax-exempt organization formed for a specific charitable purpose(s). Most people are familiar with the large private foundations formed by the famous and wealthy, such as the Bill and Melinda Gates Foundation, the Warren Buffet Foundation, the Tiger Woods Foundation, the John D. Rockefeller Foundation, or the Carnegie Foundation. The reality, however, is that most foundations are worth less than one million dollars and are formed by average people to accomplish any number of tax or charitable purposes. Unlike public charities that must raise money from the public and are controlled by a diverse board of directors, a private foundation can be closely controlled by an individual, or by a family without interference from the outside.

Private foundations are also known as 501 (c)(3) tax-exempt organizations, and must be approved by the IRS, by the State in which they operate, and by the department of justice in order to be considered truly tax-exempt organizations. Private foundations have a number of substantial tax benefits: they do not pay regular income tax, capital gains tax, gift tax, or estate tax, and any individual or company that makes a charitable contribution to a private foundation will receive an income tax deduction. Private Foundations can sell appreciated property without any capital gains taxes. Private Foundations can also receive any portion of an estate without estate taxes. Generally speaking, private foundations can receive contributions from anyone, and must spend or distribute 5% of their average net value each year in expenses or contributions related to their charitable purpose. These 5% expenditures are referred to as qualifying distributions. Importantly, foundations, unlike some other legal entities, never die, unless they are terminated by the IRS for failure to observe proper operating rules, or terminated by the family itself.

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