Understanding Private Foundations

February 21, 2023

A private foundation is a popular vehicle that allows a client to maintain high public visibility about their charitable work while providing control over board appointments and investment decisions. This structure also allows clients to hire staff and make grants to individuals, under certain circumstances, and other charities.

As time goes on, clients with private foundations can sometimes face various challenges that can be remedied by partnering with CCF, such as:

  • meeting year-end distribution requirements to avoid tax penalties;
  • donating appreciated closely-held business interests to maximize tax benefits;
  • making grants to foreign charities;
  • determining which charities to support;
  • wanting to support a charity anonymously;
  • engaging the next generation in the foundation’s activities; or
  • finding a successor.

Establishing either a donor advised fund (“DAF”) or Type I Supporting Organization (“SO”) at a public charity, such as CCF, can resolve many of these operational challenges.

In some instances, parents form a private foundation to bring their family together, teach philanthropy or impart certain values to future generations. However, the next generation may view the private foundation as being solely reflective of the founders. Also, parents may not have the time to teach their children on how to vet charities or do the other work required to operate the foundation.

A simple solution is to create a DAF at CCF and have children serve as the advisor for grants from that DAF. At CCF, successors will receive the assistance of a designated relationship manager who will help create a giving plan, identify areas of interest, supply custom-made research on charities, take them on site visits and trace the impact the grants made. At the private foundation’s annual board meeting, founders and successors can discuss the experience and lessons learned. This process allows the next generation to learn important skills with little risk and prepares them for eventually leading the foundation.

Private foundations can also partner with CCF if they are looking to make an impact locally. Having served Los Angeles for more than 100 years, CCF has a deep understanding of the complex challenges facing this community. When opening a DAF at CCF, clients get access to a team of grantmaking experts in areas such as education, health, housing, economic opportunity and immigration.

Instead of partnering, sometimes terminating an existing private foundation may be the best choice for clients and families. Working with experienced professionals is key for a successful termination as it requires many steps and interaction with the state. Failure to properly terminate can result in severe tax penalties and personal liability.

Converting a private foundation to a DAF or SO does involve terminating the existing private foundation. However, at CCF, conversion can, in some cases:

  • allow the private foundation’s name to be retained;
  • permit the client to remain involved in grantmaking decisions;
  • give the client access to CCF’s services such as legacy planning and nonprofit research; or
  • allow continued service from the private foundation’s investment advisor through CCF’s Charitable Asset Management Partnership (ChAMP).

Usually, the private foundation’s advisor will recommend that the balance of the foundation’s assets be used to create a DAF. At CCF, donors who previously operated a private foundation typically choose a DAF, but sometimes choose instead a field of interest fund, restricted fund or supporting organization.

For more information on the creating a fund at CCF, please contact the Planned Giving Team at (213) 239-2310.

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