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January 10, 2014

What is a private family foundation?

Defined for tax purposes, a private family foundation is a charitable organization that is not a public charity. It is a separate legal entity, organized as a nonprofit corporation or a trust, created by a single individual or family (donors). Private family foundations do not receive donations from the public, but are funded by family members and related persons or entities only.

A private family foundation's primary purpose is to make grants to charities, and usually does not engage in charitable services itself (those that do are called private operating foundations). Because of its charitable purpose, the foundation is given the same tax-exempt status as Section 501©)(3) public charities. Donors receive an immediate income tax deduction in the year they contribute property to the foundation (subject to the usual limitations), avoid capital gains tax on contributions of appreciated property, and reduce their taxable estates. The foundation, however, must pay excise tax on net investment income.

The main advantage of a private family foundation is that the donors control how contributions are invested, and how grants to charities are made. Typically, grants are directed to the donor's community or areas of interest (e.g., medical research, conservation).

Though a private family foundation can provide great personal satisfaction and tax benefits, there is a significant downside. Foundations must be organized and operated according to specific sections of the Internal Revenue Code, follow special rules and requirements, and maintain many administrative functions. Violations can result in taxes and harsh penalties against the foundation, its donors, and others.

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