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 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 & Family Foundations
Many individuals may have already set up Donor Advised Funds with brokerage accounts. While donor advised funds offer some donors a one-time solution, many families who seek a more institutionalized and flexible grantmaking option may want to consider forming a family foundation to achieve their goals.
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 Family Foundation
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 interested in learning more about family foundations, Cullinane Law Group has the experience and expertise to advise you and form your family foundation.