What Is a Private Foundation? Benefits of a Private Foundation

Private foundations aren't just for billionaires or well-known family names. They are an easy but powerful way to help people that will last. People, families, or even businesses can put money into a private foundation, invest it, and then use the profits to help the causes they care about most every year. This is better than just asking for money once. Donating money to private foundations that help with scholarships, community projects, healthcare, and education is a great way to make a difference over time. We'll talk about how they work, what the pros and cons are, and what it really takes to start one in this blog.

small business tax tips

What Is a Private Foundation?

A private foundation is a nonprofit that gets most of its money from one person, family, or business. It doesn't ask the public for money instead, it manages its own funds and gives out grants to schools, healthcare, community projects, or scholarships. In short, it's a way to save money and keep giving to the things you care about every year.

How Does a Private Foundation Work?

You need to set up a legal nonprofit organization and give it money or property, like cash, stocks, or even real estate, to start a Private Foundation. After the foundation is set up and the money is put to work, the money that comes from those investments is used to give to charities or make grants. 

For instance, let's say the Smith Family Foundation has $5 million to start with. They didn't spend all $5 million at once; instead, they put it to work. That means the investments will grow by $350,000 if they make about 7% a year. The IRS says that every year, at least 5% of the total assets in this case, which is $250,000, must go to charity. This rule makes sure that the money stays in the area. The rest can stay invested, which will help the foundation grow over time. The Smith Family Foundation can keep giving money to schools, hospitals, and community programs for a long time, maybe even forever.

Online accounting and bookkeeping firms

Who Can Start a Private Foundation?

Anyone who wants to set aside money in a planned way to help causes they care about can start a Private Foundation. You don't have to be very rich all you need is the desire to give regularly and make a difference that lasts.

Anyone can start it including

• Someone who wants to plan their charitable giving.

• A family that wishes to create a legacy and involve future generations.

• A business that wants to give back to the community.

• A group of people who pool their resources to support meaningful projects.

It’s simply a tool for those who want more control, consistency, and purpose in how they give.

Benefits of a Private Foundation

A Private Foundation is different from just writing a check to charity because it has its own benefits that make it a better way to give.

1. Control Over Giving

You get to choose exactly where the money goes with a private foundation. You can give money to local programs, scholarships, or community projects that are important to you instead of giving to a big charity where you might never see how your money is used. Having that much control makes your gifts more personal and important.

2. Building a Legacy

The family name is often on private foundations, which means the work goes on after you die. Your mission can be carried on by your children, grandchildren, and even future generations. It's a way to make sure that your values and charitable goals live on and become a part of your family's story.

3. Tax Advantages

Most of the time, donations to a private foundation are tax-deductible within IRS limits, which gives you an immediate reason to give. Also, any investments or assets that the foundation has grow without being taxed. This means that over time, more money is available for charity without being taxed.

4. Family Involvement

A private foundation can be a project that the whole family works on together. Many families use it to get everyone together, not just to talk about money, but also to make decisions. Imagine sitting down with your kids once a year and talking about which school, hospital, or community program needs help the most. It's not just about the money; it's also about teaching responsibility and kindness by doing things in the real world.

5. Long-Term Impact

The long-lasting effect may be the best thing about it. Private foundations give money every year and invest their assets, so they give support on a regular basis instead of just once. That consistency helps charities make better plans and makes sure your donations keep making a difference for years, even decades.

Private Foundation and IRS

The IRS sets strict rules for every Private Foundation. Each year, at least 5% of assets must be given to charitable purposes, and a detailed return (Form 990-PF) must be filed to show income, expenses, and grants. Funds can only go toward approved charitable causes, not personal benefit, and breaking these rules can lead to penalties or excise taxes.

Tax Savings with a Private Foundation

A Private Foundation doesn’t just help communities it can also create meaningful tax savings for donors. By giving through a foundation, you can reduce estate taxes, lower income tax, and avoid capital gains tax in ways that add up to big numbers over time.

Estate Taxes

When you put assets into a private foundation, they are no longer part of your taxable estate. For instance, picture a person with a $20 million estate who gives $5 million to a charity. They don't have to pay estate tax on the full $20 million, which can be as high as 40%. Instead, their taxable estate is only $15 million. That one move could save their heirs up to $2 million in estate taxes and make sure that the $5 million keeps going to charity.

Income Tax

You can usually write off your donations to a private foundation on your taxes. For instance, a business owner who makes $1 million a year and gives $200,000 to their foundation might be able to deduct that amount (up to a limit set by the IRS). This could bring their taxable income down to $800,000, which would mean they owe thousands of dollars less in federal taxes.

Capital Gains Tax

Donating appreciated assets, like stocks or real estate, can be one of the biggest tax advantages. Say you bought stock years ago for $100,000 and today it’s worth $500,000. If you sell it, you’d owe capital gains tax on the $400,000 profit often around 20%, which is $80,000 in taxes. But if you donate the stock directly to your private foundation, you avoid that tax completely. The foundation gets the full $500,000, and you may also qualify for a charitable deduction on your income tax return.

Examples of Well-Known Private Foundations

People all over the world know about the work that some private foundations do. Here are some well-known names and the causes they support:

Across the country, there are thousands of smaller, family-run foundations that give in less obvious ways. They could pay for a local scholarship, help build a small library, support a hospital in the country, or run programs for kids and teens. Their work has a ripple effect that changes lives in important ways, even if they aren't famous around the world.

Private Foundation vs Public Charity

People often mix up private foundations and public charities, but the difference is easy to see. A lot of people give money to public charities like the Red Cross or the food bank in their area. They depend on donations from the public and often run their own programs, such as food drives, shelters, or help after a disaster. A private foundation, on the other hand, usually only gets money from one main source, like a family member, a person, or a business. They don't usually run programs on their own instead, they give money to schools, other nonprofits, or community projects. They are both nonprofits that do important work, but they do it in different ways.

Conclusion

A private foundation isn't just about money it's also about how you can help. It's a way to live out your values and make something that will last for a long time. It's a simple structure that helps you give with a goal and make something that lasts, whether you're a person, a family, or a business. You don't have to be rich to make a difference; you just have to want to. With the right help, even little things can leave a lasting mark on people's lives.

FAQs

How much money do you need to start a private foundation?

You don’t need billions to start. Many families begin with around $250,000 or more, but some start smaller depending on their goals. What matters most is having enough to cover setup costs and keep giving consistently each year.

Do private foundations pay taxes?

Private foundations don’t pay income tax the way businesses do, but they do have to follow IRS rules. Most earnings are used for grants and charitable work, and if the rules aren’t followed, the IRS can apply excise taxes.

Can my family be involved in the foundation?

Yes, and that’s one of the biggest benefits. Families often sit on the board together, review grant requests, and decide which causes to support. It’s a meaningful way to pass values on to the next generation.

What happens if a foundation doesn’t give away money each year?

The IRS requires foundations to give out at least 5% of their assets annually. If they don’t, penalties can apply. That’s why most foundations plan their giving carefully every year.

Is it better to set up a foundation or just donate directly?

It depends on your goals. If you want more control, long-term giving, and a structured way to involve your family, a foundation may be the better choice. If you prefer something simpler, direct donations or a donor-advised fund could work too.

Can private foundations pay salaries?

Yes, they can. A foundation may pay reasonable salaries to staff, including family members, if they’re doing actual work for the foundation. IRS doesn’t allow excessive pay or payments that look like personal benefits.

Follow SKFinancial on Facebook / Twitter / Linkedin / Youtube for updates.