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Is A Private Foundation The Right Choice For Your Family?
By Rick D. Shaw, CPA, Partner
October 2015

In the right circumstances, a Private Foundation can be the right choice for long-term family charitable activities.

A Private Foundation is an organization that qualifies for tax exemption under the same section of the Internal Revenue Code as a public charity, but differs from a public charity in that it is typically set up by a family to effectively carry out the familys philanthropic activities. It can be organized to promote targeted and systematic charitable contributions.

After it is formed, the Foundation applies to the IRS for tax exempt status and to be recognized by the IRS as a Private Foundation. Then family members make tax deductible contributions to the Foundation, and, as Foundation trustees, remain in control of the Foundations assets, and participate in the distributions of those assets to public charities over time.

Careful planning and good management are needed if the Private Foundation is to achieve the desired objectives such as: " expanding giving opportunities; " providing current tax deductions and other tax benefits while allowing family members to control the contributions to public charities over time; " providing good public and community relations to the family; " accomplishing the familys goal of achieving its philanthropic activities in the most efficient manner possible.

There are tax issues and administrative costs to be considered. The first item is the additional limitation on the individual family members deduction of contributions to the Private Foundation in a given year. " Charitable contributions to most public charities are limited to 50% of the individuals adjusted gross income (AGI) for cash contributions and 30% of Adjusted Gross Income for appreciated property; " Contributions to a Private Foundation are limited to 30% of Adjusted Gross Income for cash gifts and 20% for appreciated property. Contributions over these limitations can normally be carried over for deduction in subsequent tax years.

Also, a Private Foundations investment income is generally exempt from income tax, but is subject to a 2% excise tax. However, careful planning in the making of grants to public charities can reduce this excise tax to 1%. There is a (rather elaborate) formula to determine the amount of annual qualifying distributions needed to reduce the excise tax to 1%.

The Foundation is required to make annual minimum qualifying distributions to public charities. Failure to make these minimum distributions can result in an additional excise tax of 30% of the amount not distributed. The excise tax can get larger if the Foundation continues to fail to make the required minimum distributions. Avoiding such problems is where careful planning and good management come into play.

The use of a Private Foundation also has estate planning implications. The contribution of assets to the Foundation removes those assets from the donors estate and potentially reduces future estate taxes.

Costs associated with a Private Foundation must be considered and include the initial formation of the Foundation and the preparation of the application to the Internal Revenue Service for tax exemption, ongoing recordkeeping and regulatory requirements, and complying with annual reporting requirements. For example, each year the Foundation files Form 990-PF with the IRS. In our experience, this form is almost always prepared by a professional and takes 4 to 8 hours to complete.

These are some of the basic considerations for those in a position to establish, operate and utilize a Private Foundation. A family with substantial assets should consider the use of a Private Foundation in its long-term financial and tax planning. It can provide current tax deductions for future charitable grants, allow the family continued control over the donated assets, and establish a legacy of charitable activities associated directly with the family name.

For more guidance on private foundations, please contact Rick D. Shaw, CPA, Partner at 315.701.6431 or RShaw@gsacpas.com.  Rick assists private foundations with tax planning and tax preparation.

Grossman St. Amour CPAs PLLC has been in business for over 56 years.   As a certified public accounting firm located in central New York, the firm remains focused on the quality service standards that are highly regarded by the accounting profession. The firm provides businesses and individuals with accounting, audit, taxation, business planning and valuation, financial planning, investment management, and fraud examination and deterrence services. For more information about how our professionals can assist you, please call 315.422.1391 or email info@gsacpas.com .

Grossman St. Amour CPAs PLLC is an independent member of PrimeGlobal, one of the top five largest associations of independent accounting firms in the world.   As of June 2014, the association was comprised of over 300 highly successful independent public accounting firms in 90 countries. PrimeGlobal provides its independent member firms with tools and resources to help them furnish superior accounting, auditing, tax and management services to clients around the globe. Through PrimeGlobal, independent member firms offer the strength and capabilities of a large, worldwide organization with technical depth and geographic reach impossible for a local firm alone.

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