THE FAMILY FOUNDATION AS AN ALTERNATIVE TO A PRIVATE FOUNDATION

When asked, "What is a foundation?" Dwight MacDonald, author of The Ford Foundation: the Men and the Millions, writes "a large body of money completely surrounded by people who want some." This is as good a definition as any, because the Internal Revenue Service does not define a private foundation per se, but simply defines it by exception. If it is not a public charity, then it must be a private foundation. Most private foundations are designed to hold funds from which contributions are made to other charitable organizations. Funds that a private foundation receives are from typically one or a small number of sources, such as an individual, a single family, or a corporation.

A private foundation is the most restrictive with respect to current income tax charitable deductions and is the only vehicle of its type to be subject to all of the excise tax rules contained in IRS Code Sections 4940 to 4945, inclusive. These rules include the excise tax on net investment income, prohibition of self-dealing, minimum distribution rules, prohibition of excess business holdings, prohibition of jeopardy investments and prohibition of taxable expenditures.

Family Foundations (Supporting Organizations)

A supporting organization, in contrast to a private foundation, actually has a definition: An organization which is organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more public charities. One of the more common public charities supported is a Community Foundation. Community Foundations have very broad missions, so supporting organizations can make distributions to a wide array of public charities.

Supporting organizations are not subject to the excise taxes charged to private foundations. Furthermore, they qualify for the most favorable deductibility limits, e.g., gifts of appreciated property to a supporting organization are generally deductible at full fair market value up to 30% of the donor's AGI. In contrast, a gift of appreciated property donated to a private foundation is generally deductible at the property's adjusted basis up to 20% of the donor's AGI.

Selection of Board

A Board of Directors, selected by the donor(s) and the Community Foundation, manages supporting organizations. The Community Foundation offers a form of supporting organization in which the Community Foundation is required, by law, to select a majority of the Directors. Since supporting organizations are separate, nonprofit corporations, they can set their own investment and grant making strategies. The Community Foundation also handles the administrative details, including maintaining financial records, writing checks, providing reports, and filing all necessary tax returns.

While there are numerous tax considerations, many supporting organizations are set up for non-tax reasons (with the exception of situations where it is inadvisable or even impermissible for a particular asset to fund a private foundation). Such non-tax considerations include perpetuating family philanthropic values to future generations, professional assistance with investments and grant making, and connection with the community. Under the Community Foundation's programs, supporting organizations are called Family Foundations.