Top 10 Reasons to Establish a Foundation Fund Instead of a Private Foundation

Top 10 Reasons to Establish a Foundation Fund Instead of a Private Foundation


A fund is easy and inexpensive to establish. By comparison, a private foundation requires a donor to create a new organization, apply for tax-exempt status, pay filing fees and incur legal and accounting expenses.


A gift of cash to a charitable fund allows a tax deduction of up to 50% of a donor’s Adjusted Gross Income (AGI). A gift of cash to a private foundation allows a lower 30% deduction.


By creating a charitable fund, a donor may deduct gifts of closely held, long-term appreciated stock at its fair market value, up to 30% of AGI. If the same gift is given to a private foundation, deductibility may be limited to the cost basis of the stock, up to 20% of AGI.


No tax is imposed on the investment income of a charitable fund because it is a component of a public charity. A private foundation pays up to 2% federal excise tax on its investment income and net realized capital gain.


A community foundation donor may remain anonymous. A private foundation must make available to the public the name and address of any substantial contributor.


No minimum distribution requirements are set for a charitable fund at a community foundation. A private foundation must annually distribute at least 5% of its net investment assets, regardless of whether the amount is actually earned.


For private foundations, strict regulations are followed regarding self-dealing between the foundation and those who manage, control or contribute to it and persons or corporations closely related to them. For example, a private foundation, along with its donor and other “disqualified persons” (including members of the board and staff) may not hold more than 20% of a related corporation’s voting stock. There are fewer restrictions on a charitable fund.


Fewer investment restrictions are imposed on a community foundation’s funds. For example, a community foundation may hold more than a 20% ownership in a particular corporation, but private foundations may not.


Fewer IRS reporting requirements are needed on community foundation grants and funds, and existing requirement are handled by the foundation’s staff at no extra charge to individual donors.


Charitable gifts to a community foundation fund are almost always considered “public support” and help the recipient organization retain its public charity status. A private foundation grant is usually not considered “public support” in its entirety and may not be as helpful to the recipient charity in retaining its public charity status.