Any family considering a “private foundation” should do so only after significant thought has been given to the charitable goals the foundation is supposed to undertake as well as a the level of commitment the family willing to bring to the table.

It’s a lot of Money

Many well-informed practitioners have recommended to their clients at least a $500,000 initial commitment to the foundation to get going. A recent article in Trusts & Estates magazine (subscription required) is the initial figure at $3 million with a “willing and able” contribution threshold of $5 million. There is a substantial upfront costs including the necessity to prepare documents federal and state filings and ongoing administrative expenses for recordkeeping, grant-making and continuing filings.

It’s not all about Taxes

A private foundation is really not the best vehicle for somebody who is solely, or even primarily interested in a tax deduction. There are other vehicles that provide tax deductions that may be better targets to explore.

It does make sense however to strategically time the contributions in order to maximize the allowable tax deduction. coordination with a tax advisor is necessary in order to make sure that this happens correctly.

Growing the Pot

With a private foundation, you essentially have a charity with some restrictions. These restrictions exist because of private foundation typically is not a charity that does its own charitable things, rather it is a grant making organization that provides grants to other charities. Furthermore, its controlled by a family leaves open the possibility for abuse. In fact, private foundations have been abused frequently and have been subject to some congressional, media and IRS scrutiny.

Even so, since we are talking about a charity, assets inside the charity will tend to grow tax-free or subject to a relatively small (1% or 2%) excise tax on net investment income.

The authors of the article cited above state that while this is usually true that growth is greater inside a foundation then in a taxable account, it is not always true. Much of this has to do with the types of assets that may be donated to the foundation.

In all instances, it is necessary to have an overall strategy, including an investment, tax and charitable strategy in order to make this particular type of arrangement work.

To DAF or not to DAF

Donor advised funds typically offer less of the financial and time commitment than a private foundation (though the numbers provided above were simply guidelines, not hard and fast rules) and are in many cases, a better fit than private foundations.

Of course, as a charitable giving plan would have to be part of an overall integrated strategy, every strategy will have to be thoroughly tested and evaluated.

The article cites the bankruptcy of “the National Heritage Foundation ”where bankruptcy court decided that all of the donor advised funds assets were available to satisfy creditors claims. This means that the philanthropist who gave money out for the purpose of charity ended up giving to creditors of the company they decided to operate their Donor Advised Fund. 

Undoubtedly, for many philanthropists, this may well be a dealbreaker on donor advised funds.