Private Foundation vs Donor Advised Fund: Overview

• Definition: A nonprofit corporation or trust, funded primarily by a single individual, family, or company, that gives grants to other charities or runs its own charitable programs.
• Tax benefit purpose: Contributions you make to your foundation are tax deductible (subject to IRS limits).
• Key difference from a public charity: It's privately funded and usually controlled by its founders or board, not by the public.

• Mission statement: Clearly define the charitable purposes (must fall under IRS Section 501(c)(3) categories).
• Governance: Decide who will serve as the board of directors/trustees (often family members).
• Operating structure:
  • Private nonoperating foundation (i.e., Grant making foundation): Makes grants to other nonprofits.
  • Private operating foundation: Runs its own programs directly.
• Name: Check state availability and trademark databases.

• Choose a state: Many use their home state, but some choose states like Delaware or Nevada for ease of governance.
• File articles of incorporation (nonprofit) or create a trust document. Include IRS required charitable purpose and dissolution clauses.
• Adopt bylaws that specify governance, meetings, and powers.
• Hold the organizational meeting of the board to approve bylaws, elect officers, and authorize applying for tax exempt status.

• File IRS Form SS 4 (can be done online) to get an Employer Identification Number. This is required before filing for tax exemption.

• File IRS Form 1023 (Application for Recognition of Exemption) or Form 1023 EZ if eligible.
• State your charitable activities, how funds will be used, and submit organizing documents.
• Pay the application fee ($275 for 1023 EZ, $600 for full 1023).
• Most family foundations file the full Form 1023; the streamlined 1023-EZ is limited to small organizations (projected gross receipts of $50,000 or less and assets of $250,000 or less), which rarely fits a foundation funded with meaningful assets.
• Once approved, the IRS will issue a determination letter granting 501(c)(3) status.

• Depending on the state, you may need to register with the Attorney General's Charitable Division or other charity regulators before soliciting or disbursing funds.

• Contribute assets (cash, stocks, real estate, crypto, etc.).
• Tax deduction limits:
  • Cash contributions: Up to 30% of AGI (for private nonoperating foundations)
  • Appreciated assets: up to 20% of AGI (for private non-operating foundations). Fair market value is allowed only for publicly traded stock held over a year (qualified appreciated stock). Other appreciated property, such as real estate or an interest in your practice, is generally deductible only at your cost basis when given to a private foundation.
• Carryforward: Excess deductions can be carried forward for 5 years.

*Contributions to private operating foundations are generally subject to the same limits as public charities (60% of AGI for cash and 30% for non cash).

Private foundations face stricter rules than public charities:

• Minimum payout requirement: Must distribute at least 5% of net investment assets annually for charitable purposes.
• Excise tax: Usually 1.39% on net investment income.
• Self dealing prohibitions: Can't transact with disqualified persons (you, family, related entities).
• Annual filing: IRS Form 990 PF disclosing financials, grants, and board compensation.

• Income tax deduction for your contributions.
• Capital gains avoidance: Donating appreciated assets avoids capital gains tax.
• Estate tax reduction: Assets donated to the foundation are removed from your taxable estate.
• Family legacy: Children can serve on the board and carry on philanthropy.