private foundation alternative

Private foundations established by a family or business have been a popular vehicle for carrying out philanthropic goals on a long term basis. Through the use of private foundations, the charitable minded have been able to accelerate tax deductions, involve family members and obtain community visibility.

Unfortunately, the administrative burdens of maintaining a private foundation over time can be formidable and costly. Private foundations of small or even moderate size cannot afford staff assistance to deal with grant requests that come in. In addition, the tax benefits of gifts to private foundations are more limited than those of gifts to other charities. (For example, many gifts of appreciated property to private foundations can only be deducted at your cost basis rather than their full market value.) Private foundation tax returns are public information, affording little privacy in the operation of the foundation. Often, the charitable interests of the second and third generation family members are not consistent with the founders of the private foundation.

Thus, a private foundation is not a practical option unless you are prepared to commit a substantial amount of time and/or money - and your heirs or other future trustees are similarly dedicated.

Comparison: Private foundations versus a named fund at Cumberland Community Foundation

Set-Up Procedures and Costs
Private foundations must incorporate and apply to the IRS for tax-exempt status and there are legal and accounting fees to establish a foundation. Meanwhile, with Cumberland Community Foundation procedures are immediate. Plus, the community foundation does not charge start-up fees. We charge an annual administrative fee ranging from 0% to 1%, significantly lower than operating a private foundation. Because of our economies of scale and our operating endowment, our costs are among the lowest of all nonprofit organizations.

Tax Treatment of Contributions
With a private foundation, current year tax benefits are limited to 30% of income for cash gifts and 20% of income for appreciated property gifts. At Cumberland Community Foundation, current year tax benefits are 50% of income for cash gifts and 30% of income for appreciated property gifts.

Contributions of Appreciated Property
At Cumberland Community Foundation, Federal and North Carolina income tax deduction for all appreciated property gifts may be taken at 100% of fair market value. With a private foundation, the Federal and North Carolina income tax deductions for appreciated property gifts are generally limited to a person's basis. (Please note: the ability to make gifts of publicly traded stock to private foundations and take a deduction based on the fair market value of the stock is an exception occasionally allowed by Congress. This rule has changed repeatedly over the last several years.)

Excise Taxes
At Cumberland Community Foundation, there is NO tax on investment income, while at a private foundation, excise taxes are up to 2% of investment income annually.

Investment, Audit, Accounting and Tax Returns
With a private foundation, you must perform financial and administrative services yourself, or contract or hire staff to fulfill these functions. Plus, an annual 990-PF tax return is required. Cumberland community foundation handles all financial and administrative management, files annual tax return and provides an annual independent audit.

Liability and Insurance
With a private foundation, and directors and officer's liability insurance, employee bonding, and office insurance must be separately purchased. Meanwhile, Cumberland Community Foundation automatically covers liability and office insurance policies.

Grant Payout Requirement
Private foundations are required to distribute 5% of their assets annually to avoid penalty taxes. There is no payout requirement with Cumberland Community Foundation, so your fund can accumulate income for a sizable project or grant as you choose.

Grant Management
A private foundation must verify the charitable status of all recipient organizations. Cumberland Community Foundation verifies charitable status of all recipient organizations for you, plus donors have access to the community foundation's strategic grantmaking services.

Privacy
Private foundations are required to file detailed tax returns on grants, investment fees, trustee fees, staff salaries, etc. These are public records and are compiled into grantseeker directories, internet files, and other widely distributed resources..

At Cumberland Community Foundation, individual donors or grants can be kept private. If the donor wishes, the community foundation can serve as a buffer between the donor and grantseekers.

Call Mary M. Holmes, Executive Director of Cumberland Community Foundation, for more information on alternatives to private foundations. (910) 483-4449.

"Cumberland Community Foundation does not render legal, accounting or tax preparation advice.  Consult your tax and legal advisors about your specific situation."