One of the key ways to engage in philanthropy is through a private foundation. Recently, private foundations have become an increasingly popular tool for fueling social change, making them some of the most influential organizations in the world. While the primary focus of a foundation is charitable giving, there are important benefits to donors who wish to create them. These benefits are both financial and personal. Understanding the benefits fully can help you decide whether creating a foundation is the right choice for your future. Some of the major benefits you should consider include:
1. Building a legacy
Foundations are typically set up last in perpetuity unlike a direct gift, which is a one-time occurrence. Some of the biggest names in philanthropy, such as Carnegie or Rockefeller, are known because of the foundations behind them. A one-time gift can have a major impact, but generations of giving create a true legacy.
The point of a foundation is to invest the principal and generate revenue that can then be used for charitable giving. Over time, the value of a foundation can grow far beyond the initial funding to keep the spirit of giving alive. This means that your children, grandchildren, and generations beyond can participate in giving and carry your values into the future.
2. Saving on taxes
Many people are motivated to start a foundation because of the tax benefits. The tax deduction is given upfront when the foundation is created. In turn, foundations are required to make minimum qualifying distributions each year. Currently, foundations must spend at least 5 percent of the prior year’s net results to maintain tax benefits. All assets that are transferred to a foundation are exempt from estate and gift taxes even though they remain under your control and can be invested in perpetuity. These contributions are irrevocable but only get taxed at an excise rate of 1 percent or 2 percent of capital gains annually. Moreover, you can donate appreciated assets to your foundation and get a tax deduction for their full fair market value, up to 30 percent of adjusted gross income. This benefit has a five-year carry forward.
3. Running charitable programs
A great benefit of a foundation is that it can run its own programs in addition to making grants to other organizations. These programs are known as direct charitable activities. Private foundation donors can pull on a wide range of unique resources and skills to produce results that simply would not be possible with cash alone. Some great programs that have been run by foundations include sending soccer balls to children in countries facing conflict, paying for business attire for people seeking employment, and running a mathematics museum that teaches children how they can apply mathematical concepts to their everyday lives. A foundation avoids the need to create a nonprofit to accomplish these goals.
4. Hiring staff members
When you have a foundation, you can pay qualified staff members to work for it. Many people hire their family members to run the foundation, which is permissible under federal tax law provided that the compensation is reasonable. Of course, you can also use this opportunity to reach out to people in your community and provide new employment opportunities. If you are interested in hiring people to work for your foundation, it is important to ensure compliance with regulations created by the IRS, so be sure to have an expert review the situation. Nevertheless, it can be a very rewarding endeavor.
5. Building a board
Foundations tend to have a board that helps decide which grants to make. This board may consist solely of family members, but it is a great way to get different opinions and ensure you are making the right decisions when it comes to philanthropic giving. Also, most individual donors are used to getting many unsolicited requests, and it can be difficult to say no. With a foundation, you will need to pass decisions through the board, so it becomes easier to be more discerning, especially if you create a mission statement about the impact that you want to have. This sort of mission statement also makes it easier for organizations that align with your values to find you.
6. Connecting the family
As you build your foundation, you will likely get your family involved. Allowing the family to work toward common philanthropic goals can be a great way to grow closer. The foundation provides a regular excuse for the family to meet and discuss important matters. Also, you can use the foundation as a way of teaching your children important family values and ensuring these ideals can be passed on to the next generation.
Furthermore, foundations can be used to teach important life skills. Show your children how to do research, track results, and alter their approach as they attempt to make an impact.