Private Foundations – The Best Laid Plans? – Part 1

May 9, 2012

One of the wonderful things I love about Los Angeles is our entrepreneurial spirit. Whether that means opening a café selling locally roasted coffee or providing consulting services to help contractors build more energy efficient homes, Angelenos have a desire to fill niches, innovate, and build better mousetraps. This entrepreneurial spirit often extends to our charitable giving, leading us to consider enhancing or formalizing our giving through a dedicated vehicle.

People are often advised to create a private foundation. Why?

Private foundations are, essentially, a type of charitable, grant-making organization that allows a person to:

  • leave a family legacy
  • employ family members
  • control board appointments and investments
  • control which charities to support

Private foundations also help maintain high public visibility and are, arguably, one of the most flexible charitable solutions. Most people don’t know, however, that flexibility often comes at a cost. For example:

  • Administrative burdens:
    Forming the private foundation
    Investing its assets
  • Identifying and assessing charities to receive grants
  • Tax return preparation and other IRS and state tax filings
  • Reduced income tax deductions
  • Distribution requirements to avoid IRS penalties
  • Lack of anonymity

While private foundations can lead to innovative approaches to solving needs that are near and dear to the donor, careful consideration should be given to the family’s taste for administration, the foundation’s ability to address changes in the family, and the true impact the foundation can deliver to the charitable cause it targets.

It’s also important for individuals and families to know that because of the array of different charitable institutions that exist today, they don’t have to go about their philanthropy alone. Community foundations and national charitable funds are available to help execute your philanthropy (and actualize the mission behind it), without you having to shoulder the administrative burdens behind it.

You may be surprised to know that many private foundations fail, and my next post will explain why.

Thanks for reading,

Don Gottesman is a senior development officer at the California Community Foundation.

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