Jess S. Morgan & Company, Inc

Business Managment & Invesment Advisory Services

What is a Private Family Foundation, and Why Set It Up?

04-11-2014 / By: Jeremy D. Stahl, CPA


A private family foundation is a vehicle designed to allow families to achieve their philanthropic goals in  a tax efficient manner.

 

A family foundation has an initial board of directors which typically includes the family patriarch and/or matriarch.  Subsequent or additional board members usually consist of family members or close personal advisors that are familiar with the Founders’ goals and aspirations for the Foundation.  When established, a private family foundation is funded with cash, appreciated securities, or other assets.  The Foundation then reinvests these assets to fit the investment goals set forth by the board. It then uses the investment income and appreciated assets to make future donations or grants to charities approved by the Foundation Board.

 

There are several primary benefits to having family members on the board of the Foundation.  Most clearly, it allows a high level of control for the Founder with the Foundation’s investment assets, and its charitable giving processes and decisions.  A secondary but equally important benefit of the private family foundation, are its educational capabilities in serving as a training base for younger family members.  It can teach invaluable lessons in charitable giving, handling money, choosing investments, articulating family values, and managing intra-family relations.

 

The tax benefits include income and estate tax benefits in one vehicle.  All contributions to a private foundation provide immediate income tax deductions during the donors’ life.    A private foundation will also provide estate tax benefits when receiving gifts at death.  These gifts at death can include an IRA, a life insurance policy, or a charitable remainder trust, all of which pass onto the Foundation without incurring any estate tax.

 

The IRS imposes a tax of 2% per annum on the net investment income of the Foundation, which creates an excellent tax break when contributing appreciated assets that normally incur a 15% capital gains tax upon their sale.  Additionally, the IRS requires that the Foundation distribute a minimum of 5% of its total assets every year.

 

Setting up private family foundations and administering them is complex.  It is advised that both an experienced CPA and estate lawyer be consulted.

 

 
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