Creating Your Legacy through a Private Foundation

There are many ways to fulfill your charitable goals throughout your lifetime, but not many of them will continue to drive that philanthropic spirit through future generations. The desire to create a legacy of giving is what leads many families to consider establishing a private foundation.

Private foundations are nonprofit tax-exempt entities established to distribute grants to charities that are important to the foundation’s board members. Special rules, tax benefits and restrictions apply to private foundations and should be considered before deciding if one is right for you.

Benefits of a Private Foundation

Private foundations have some unique advantages that you will not find in comparable charitable giving vehicles, such as a donor-advised fund (DAF). These include:

  • Can be operated by like-minded family members or other trusted individuals, who can ensure your charitable wishes continue to be fulfilled long after your lifetime
  • Gives the family complete control over how the funds are used and where assets are invested
  • Provides opportunities to maximize gifting and minimize capital gains taxes by transferring appreciated assets
  • Allows generational family governance through which family members can make bulk contributions out of their own personal wealth and pass philanthropic values down to future generations

Challenges of Operating and Managing a Private Foundation

While a private foundation can give you greater control over your donations and carry out your philanthropic legacy, it does have limitations when compared to a DAF or other gifting strategies. Before deciding to establish a private foundation, be sure to consider:

  • Organizational expenses, such as setup costs, annual fees and professional services for annual tax return filings and investment management
  • Operational and governance aspects that will require you and your family to manage the foundation like a business
  • Annual minimum grant distributions that will trigger excise tax penalties, if not met
  • Annual excise tax on net investment income
  • Potential limitation on tax benefits that can be realized when making contributions of cash or other appreciated assets to the private foundation
  • Self-dealing rules that prohibit certain transactions between the foundation and disqualified persons (e.g., foundation board, family members and contributors)
  • Annual fiscal reporting and tax compliance burdens

The decision to establish a private foundation should only come after careful evaluation of your philanthropic goals and a full understanding of the responsibilities and challenges associated with operating your own private foundation. Grassi’s Private Client Services and Nonprofit professionals are available to help you weigh the benefits and risks and determine which gifting strategies will have the greatest impact on your chosen charities and family’s future.

Rozleen Giwani Rozleen Giwani, CPA is a Tax Partner at Grassi, where she focuses on tax planning and preparation services for family offices, high-net-worth individuals and closely held businesses. She has spent more than 18 years advising high-profile and ultra-high-net-worth individuals, multi-generational families, CEOs, executives and entrepreneurs on achieving their full tax-savings potential. As a leader in Grassi’s Family Office practice, Rozleen leads ultra-high-net-worth families and... Read full bio

David M. Rottkamp David M. Rottkamp, CPA, is an Audit Partner and Nonprofit Practice Leader, at Grassi. David has over 36 years of experience providing audit and advisory services to the not-for-profit and health care industries. David focuses on organizations serving individuals with special needs, religious organizations, educational institutions, membership associations, social service providers, healthcare providers, foundations, and the arts and culture world. David’s technical knowledge allows... Read full bio