Considering a Private Foundation?

The decision to set up a private foundation or utilize a local community foundation is a classic dilemma between control and efficiency. Both are tools for strategic giving, but the differences are extensive – from tax issues and yearly payouts to operations and cost. Most experts say you shouldn't begin to think about starting a private foundation with less than a $5 million commitment.

Creating a Donor Advised Fund with Southeastern Illinois 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, see the chart below:

Creating a Donor Advised Fund with a Community Foundation versus Forming a Private Foundation

 
Donor Advised Fund with a Community Foundation 


Private Foundation 

 

Description

For donors who wish to actively advise about grant recipients;shares public charity status with the Community Foundation

For donors who want extensive control over grant making, investments and board selection; must apply for private foundation tax-exempt status from IRS

Creating

Fund established with Community Foundation can be created in one day Nonprofit corportation or trust organized as a private foundation with IRS; takes several months to create

Donor Control 

Donor makes grant recommendations to the Community Foundation for approval Donor retains complete control over investments, grant making and board selections, subject to IRS requirements

Start-up Costs

None

Several thousand dollars, similar to corporate start-up, requiring substantial legal, accounting and operational start-up costs

Annual Costs 

1.25% annually for funds less than $500k. Tiered fees for funds exceeding $500k. Approximately $5,000 annually for legal and accounting fees; plus staff, administration and facility expenses

Legal Identity

[Donor's Choice of Name] Fund of the Community Foundation; may have separate letterhead for grant making purposes Separate nonprofit entity 

Annual Taxes and Filings

Not required; exempt from excise tax  Must be filed by private foundation with required supporting schedules; excise tax can be 1-2% annually 

Payout Requirement 

None Must pay out for charitable purposes a minimum of 5% of assets value regardless of annual income


Charitable Tax Deductions

Public charity status; 30% AGI for appreciated property, 50% AGI for cash  Private charity status; 20% AGI for appreciated property

Investment Flexibility 

Fund assets are professionally invested through Community Foundation Must research and secure its own investment vehicles; must divest excess closely-held stock
Administration 

All reporting and record keeping handled by Community Foundation; no separate tax return required  Must establish and/or obtain: personnel, appoint board members, facility, accounting, recordkeeping and file tax returns 
Self-Dealing Rules 

Private foundation self-dealing rules do not apply 

Strict regulariotns prohibit most transactions between a private foundation and its donors (included related persons or corporations)

Grant Making Expertise 

Grant making services provided by Community Foundation; access to Community Foundation expertise and community knowledge Must arrange and support own grant making and monitoring structure
Governing Body

Advisors and successor advisors may be donor, family members and others May consist of donor and related persons

Minimum Contribution to Create

$10,000 fund minimum  Substantial assets required, typically $10 million or more to be economically feasible 
Continuity 

May designate next generation or successor advisor  Can continue to future generations
Fiduciary Responsibility 

Provided by Community Foundation Private foundation has full fiduciary responsibility 
Liability and Risk Insurance 

Provided by Community Foundation  

Must be purchased by the private foundation


Here are some advantages to establishing a Donor Advised Fund:

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.

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.

Grant Management - Southeastern Illinois Community Foundation performs due diligence on each organization prior to distributing funds, making a responsible gift to ensure the best use of funds.

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.