With the popularity and ease of donor advised funds, why do some donors still choose to start a private foundation to conduct their charitable giving?
Private foundations are different from other types of charitable organizations because they receive “private” funding. Their funding comes from one donor, one family, one company, or any other small group of donors.
Private Foundation Pros
One of the key benefits of starting a private foundation include the founder’s ability to retain control over the foundation. Unlike a donor advised fund which is legally owned by the sponsoring charity, a founder of a private foundation can decide who or what the foundation will benefit, how its assets are invested, how it is governed, and even who will govern it after the founding donor’s death.
Private foundations have great flexibility to pursue their mission. They can carry out their own programs, make grants domestically and abroad, make program-related and mission-related investments, carry on scholarship programs, and make grants to needy and distressed individuals. Private foundations enter into enforceable agreements with donors to better ensure the terms of their grants are respected. Private foundations are also able to hire staff.
Private Foundation Cons
While private foundations enjoy incredible autonomy and flexibility, these advantages come at a price in the form of greater regulation. The laws governing private foundations include stricter limits on self-dealing, requirements to expend a minimum amount each year, limits on overly risky investments, rules that require certain procedures be followed for certain types of grants, and that restrict who can receive grants. Private foundations are also prohibited from most forms of lobbying and are subject to lower deduction thresholds.
However, upon close inspection, many donors find these additional rules do not overly burden them. For example, donors who have no plans to transact with their foundations won’t have issues with the self-dealing restrictions. Donors who are planning to be active in their philanthropy are unlikely to have any trouble meeting the minimum distribution requirement. Most donors have no interest in jeopardizing their foundation’s assets with risky investments. Many donors aren’t even impacted by the lower deductibility thresholds since they likely aren’t funding their foundation with more than 30% of their income in any one year.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations. Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.