Article previously published December 3, 2023. Updated December 2, 2024.
A family foundation is a type of 501(c)(3) tax-exempt nonprofit organization that allows its founders to set up a formalized charitable grantmaking enterprise funded by one individual or a few family members. It is usually funded with family assets.
The family foundation is a flexible structure that allows an individual and her family to fund, manage, and support their charitable missions, educational scholarships, and establish a greater charitable impact, even possibly leaving a philanthropic legacy for generations to come.
Family foundations can be funded with large one-time gifts or with smaller gifts over a longer period of time. Donors can contribute cash, publicly traded securities, private stock, real estate and other assets. Family foundations can invest their assets, within IRS rules, allowing their charitable contributions to grow over time.
Donor Advised Funds (DAFs) vs. Family Foundations
Many individuals utilize donor advised funds through brokerage accounts. While donor advised funds offer some donors a one-time solution, many families who seek a more flexible grantmaking option may want to consider forming a family foundation to achieve their goals.
Family Foundations Benefits
Private foundations — how they can benefit a family:
- Family charitable legacy – you can review and decide your family’s charitable vision. What types of causes are important to you? What types of charities do you want to support?
- Introduce younger family members to philanthropy.
- Work together as a family to create a foundation mission statement and purpose, select fund recipients, and make financial gifts to charities.
- Control of your charitable giving. Donors generally are in charge of the foundation’s operations, making sure that funds are donated to causes in line with their values.
- Tax benefits. Possible to receive a tax deduction of up to 30% of adjusted gross income (cash contributions) and up to 20% of AGI for appreciated publicly traded securities.
Differences between types of foundations
The word “foundation” can be especially confusing, since different types of tax-exempt entities can use the term foundation in its name.
The IRS recognizes different types of private foundations: private foundations and private operating foundations. Although the IRS uses a number of criteria to distinguish between the two, in practice, the key differences between a private nonoperating foundation and a private operating foundation are how they distribute their income or conduct activities:
- A private foundation might grant funds to other tax-exempt charitable organizations. It accomplishes its exempt purpose by grant-making to other organizations.
- A private operating foundation might distribute funds to its own programs that exist for charitable purposes. It devotes most of its resources to the active conduct of its own exempt activities.
Setting Up a Private Foundation
We handle the full set-up of private foundations: from state formation to IRS tax-exemption.
Once set up, you can fund foundations with different types of assets: cash, securities, real estate.
It is important to understand the legal requirements and IRS rules pertaining to a family foundation, such as conflicts of interest, compensation, grantmaking and excise taxes. If you’re ready to learn more about charities and foundations, Cullinane Law Group has the expertise to advise you and form your family foundation. We handle all of the steps to get your family foundation operating.
