Articles from our E-Update

For many years, establishing a private foundation was virtually the only choice available. Even now, many lawyers, financial planners and estate planners will recommend a private foundation without thoroughly analyzing the needs of the individual or family. For many people it is just the right thing to do but it should be thought through carefully.

Foundations, on the whole, are set up to operate in perpetuity and as one man has said with great wisdom: "Perpetuity is a very long time." I think Curtis Meadows, a Gathering resource and former President of the Meadows Foundation in Dallas, Texas, has the best perspective on reasons for setting up a private foundation. You should be concerned about problems that are long term and you want to provide funding for long term solutions. You should be ready to meet the challenge of preparing your family, trustees and successors for the responsibility of the work. You should be willing to live with the likely possibility that the next generation of leadership will change the focus of the foundation after your death. Finally, the average corpus of the family foundation in the U.S. is $5,000,000 and the expenses of maintaining the foundation make it an unnecessary burden to start with less than that.

The Association of Small Foundations (www.smallfoundations.org) has a very comprehensive guide to starting a private foundation. The following is from their material.

Types of Foundations

The IRS distinguishes among different types of private foundations. If you determine that a private foundation is the appropriate charitable vehicle for you, consider the type of private foundation that most appropriately matches your long-term goals and capabilities. Although the initial foundation structure could be changed, it is a complicated process and should be done with the aid of an attorney and accountant.

Standard private foundations, also referred to as private non-operating foundations, are the most common form of private foundations. Standard private foundations vary in size and purpose. They typically obtain funding from a single bequest, or may receive annual contributions from an individual, group of individuals, or members of a family. The primary purpose of standard private foundations is to make grants to public charities, rather than operate any substantial programs. Standard private foundations must spend an amount equal to at least five percent (5%) of its net investment assets on qualifying grants and administrative expenditures annually. Private foundations can be structured as either a charitable trust or a nonprofit corporation.

A private foundation organized as a charitable trust is governed by a trust agreement that appoints the initial trustees, designates the trustees' initial powers and provides for the future selection of trustees to manage and operate the foundation.

A private foundation organized as a nonprofit corporation must normally file articles of incorporation with the Secretary of State.

A nonprofit corporation is governed by a board of directors that elects officers and carries out and properly records the foundation's activities. Each form has advantages and disadvantages.

A trust is typically simpler to create and operate than a corporation. They have fewer requirements concerning trustees, state filings, regularity of meetings, minutes, etc. Trusts also have lower taxes for any unrelated business income. However, trusts generally offer less flexibility than nonprofit corporations.

For example, court approval is generally required for any changes to the trust agreement. For some people, however, this inflexibility may be desirable to ensure their money stays directed towards a specific cause or charity. Corporations offer a tremendous amount of flexibility that is not present in the trust structure.

As well, a nonprofit corporation also generally provides directors with greater protection from personal liability. However, nonprofit corporations have more formal operating requirements than trusts and are therefore slightly more difficult to create. Many states also require regular meetings, minutes and annual reports.

Assoc. of Small Foundations