community vs. private foundation
Clients may believe that a private foundation provides their only option for long-term involvement with assets they set aside for charitable purposes. In reality, a named fund or supporting organization at a community foundation offers numerous advantages to these clients, provides real ways for them to stay engaged in giving and avoids many of the hassles and costs of private foundation management.
We welcome the opportunity to consult with you and any clients who would like to discuss the advantages and disadvantages of each approach. Our desire is to help you find the solution that works best for your client and our community. Contact us today to set up a meeting.
Compare Foundation Options
The following chart provides a detailed look at the differences between a private foundation and a community foundation. The first section compares the two options as charitable giving vehicles. The second section looks at these options from an investment standpoint.
Feel free to share this information with your clients as they explore all their giving options. Call us at 540-373-9292 to consult on a specific scenario.
| Community Foundation Named Charitable Funds and Private Foundations | ||
|---|---|---|
| Â | Community Foundation | Private Foundation |
| IRS charitable status | 501(c)(3) & 509(a)(1) (public charity) | 501(c)(3) (private foundation) |
| Governing body | 1. Advisory Committee Advisor may be established or may be committee of family members and/or others. Successive generations may participate in future giving. | Governing body may consist of donor and related persons.
|
| Tax treatment of cash gifts | Deductible up to 60 percent of adjusted gross income (AGI). | Deductible up to 30 percent of AGI. |
| Tax treatment of gifts of appreciated publicly-traded securities (held more than one year) | Fair market value deductible up to 30 percent of AGI. | Fair market value deductible up to 20 percent of AGI. |
| Tax treatment of closely held stock or real estate (held more than one year) | Fair market value deductible up to 30 percent of AGI or cost basis up to 50 percent of AGI. | Deduction limited to donor's cost basis, up to 20 percent of AGI. |
| Deduction carry-over available | Five additional years | Five additional years |
| Ease of establishment, incorporation and tax exemption | One signed document (Instrument of Transfer) Automatically covered by the Community Foundation's tax exempt status | Corporation or trust required Must apply to IRS for tax-exempt status using Form 1023. (IRS may take six months or longer to process) |
| Excise tax on investment income and net realized capital gains | None | Generally 2 percent; may be reduced to 1 percent under special circumstances. |
| Self dealing rules | Not applicable | Strict prohibition under IRC Section 4941. |
| Minimum payout requirements | None (can accumulate toward a sizable project or grant with no required payout) A Community Foundation fund has the flexibility to hold low yield property. | Yes (minimum 5% of average asset value each year under IRC Section 4942) A private foundation must meet the minimum distribution rules whether or not the foundation's investments earn that amount. |
| Restriction on private investment | Yes | Yes (in addition, you cannot engage in acts that may violate strict self dealing rules that apply only to private foundations) |
| Restriction on private investment | Yes | Yes (in addition, you cannot engage in acts that may violate strict self dealing rules that apply only to private foundations) |
| Restriction on holding interests in business enterprises | No | Yes |
| Application of expenditure responsibility procedures for grants to organizations and programs that are not public charities | No | Yes (under IRC Section 4945 - taxable expenditure retax for failure to make "expenditure responsibility" investigations) |
| Possibility of advisory role for donor and family in grantmaking | Yes | Yes |
| Privacy | Yes. Individual donors' fund assets size, gifts and grantmaking are kept private and confidential. No public disclosure of individual grants or donations is required. Donors are generally recognized for grants disbursed, but grants may be made anonymously. If a donor wishes, the Community Foundation can serve as the buffer between donors and grant-seekers. | No (IRS Form 990-PF which is open to public inspection) Private foundations are required to file detailed tax returns on grants issued, investment fees, trustee fees, staff salaries, asset size, etc. and then publish a notice to the public that the tax return is available for public viewing. These are public records and are often compiled into grant-seeker directories. |
| Investment, accounting, audit and tax returns | The Foundation handles all investments and accounting, files annual tax return and provides annual independent audit. | Trustees must perform, contract or hire staff for these services. |
| General administration | Community Foundation handles all financial and administrative management. | Trustees must perform, contract or hire staff for these services. |
| Grant administration | If donor wishes, the Community Foundation can identify potential recipients, investigate applicants, make grant payments and monitor performance. | Trustees must perform, contract or hire staff for these services. |
| Liability and insurance | Advisors to funds are covered by The Community Foundation's Directors and Officers insurance policies. Fundraising events and other activities will require insurance. | Any Directors and Officers liability insurance, employee bonding, and office insurance must be separately purchased. |
Call or email us to schedule a meeting where we can discuss the various points of comparison.