The Changing Face of Private Foundations
I have previously written about charities and charitable giving in America and noted that, according to some 2012 statistics, 88% of U.S.Households give to charities. All that giving makes the United States arguably one of the most ‘philanthropic’ nations in the world. In 2011 it was reported that there existed more than one million charitable organizations in the United States.
Most of us can only dream of someday endowing a private foundation for a cause that is dear to our heart. A few fortunate Americans find themselves in the enviable financial position to be able to create and endow a private foundation. What exactly is a private foundation? A private foundation is a legal entity; must be ‘approved’ by the IRS; and there are significant tax rulings that regulate private foundations. Private foundations usually have only a few sources of funding (endowment), those funds coming from an individual, a family, or a business entity. A private foundation can be started (endowed) with one initial funding and/or periodic gifts can be made to continue to fund the foundation. There is according to some statistics an astounding 80,000 private foundations in existence in the U.S. and they hold assets of more than $500 Billion.
Private foundations are often seen as a legacy for future generations. One does not have to look far to name three “mega” foundations, like Ford, Rockefeller and Gates. However, there are other ‘not-so-mega foundations’, those that individually hold less than $50M. Those smaller private foundations, according to some statistics, make up 98% of the approximate 80,000 private foundation in the U.S. There are some foundations with only a few hundred thousand dollars of endowment. The trend and changing face of philanthropy seems to be: more smaller foundations, and those smaller foundations making smaller grants.
Many of these foundations are relatively “new” having been founded and funded within the last fifteen years. Private foundations require IRS approval and have a Board to manage the affairs of the foundation. The Board (within the purview of the foundation legal documents) decides (among other matters) how, when, for what purpose, how much and to whom funds are granted. Grants that a private foundation make are reported via the IRS and therefore are discoverable. Private foundations require: a Board, regular Board meetings; minutes of those meetings and IRS filings to be made. In addition, there are rules as to how much a foundation must pay out annually.
In recent years there are many more younger philanthropists endowing private foundations and those philanthropists are still in their ‘earning years’. They are more willing to ‘replenish’ their endowments to continue the work of the foundation when necessary. The ‘spending side’ of private foundations is principally the grants that a foundation will make – the ‘expense’ side is the administrative expenses of that charitable giving. Again, the changes on the spending side tend toward smaller grants with more of a ‘local’ impact on the giving.
If you are in the enviable financial position of endowing your own private foundation, consider the impact of that venture on your overall estate plan, legacy and life goals.
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