Private v Public Foundations

Our family has owned a private (“family”) foundation for about eight years. We use it as a kind of detention pond^* for funds we want to give away.

Our attorney sent me some information today about the differences between private foundations such as the two we set up — one, a “family” foundation; the other, a “corporate” foundation (sponsored by the company we own) — and public foundations, especially foundations that offer Donor-Advised Funds (DAFs).

The following comparison chart is slightly modified from one put together by a cause-oriented foundation (COF) whose brochure our attorney gave us.

	Cause-Oriented Donor-Advised Fund (DAF)	Commercial DAF	Private Foundation
Donor Involvement	Donor recommends grants to qualified nonprofit groups. Certain donees may be disallowed by COF rules.^** Investment decisions are made by donor, but are limited to COF’s approved investment choices. Outside investor advisor may be permitted.	Donor recommends grants to qualified nonprofit groups. Investment decisions are made by donor, but are limited to the fund’s approved investment choices.	Donor appoints board, which controls investments and grantmaking. (Board may consist of two family members.)
Tax Status	Participates in the COF’s public charity status.	Participates in the entity’s public charity status.	Applies to IRS for private foundation tax-exempt status.
Income Tax Deductions for Gifts of:
Cash	Up to 50% of adjusted gross income.	Up to 50% of adjusted gross income.	Up to 30% of adjusted gross income.
Publicly traded securities	Fair market value up to 30% of adjusted gross income.	Fair market value up to 30% of adjusted gross income.	Fair market value up to 20% of adjusted gross income.
Real estate and closely held securities	Fair market value up to 30% of adjusted gross income.	Fair market value up to 30% of adjusted gross income. Usually real estate is not accepted.	Deductible at cost basis.
Grantmaking Support	Professional staff may be available to help identify and assess grantees, provide input on community needs, and verify non-profit status.	Varies. Most have no professional expertise and do minimum due diligence on grant recipients.	Donors must arrange and support their own grantmaking and monitoring structure.
Grants to Individuals	May be permited under some circumstances (e.g., scholarships)	Typically not permitted.	Permitted under some circumstances (e.g., scholarships). Extra oversight required.
Distribution Requirements	Varies. Usually no more than 5% of net asset value annually.	Varies. Usually no more than 5% of net asset value annually.	At least 5% of net asset value annually.
Start-up Considerations
Costs	None.	None.	Up to a few thousand dollars for legal and accounting expenses and filing fees.
Time frame	Immediate.	Immediate.	Several months.
Minimum contribution	Varies. Usually $10,000-$25,000 for individuals.	Varies. Usually $10,000-$25,000 for individuals.	None.
Annual Administrative Requirements
Fees	Varies. 0.5–2% of assets for administrative fees, and 0.3–1% for investment expenses are common.	Usually 1% of assets for administrative fees and 0.5% to 0.75% for investment expenses.	Professional grantmaking, administrative, and/or investment support must be staffed and financed independently.
Taxes	None.	None.	Excise tax up to 2% of net investment income, including net capital gains.
Reporting	None.	None.	Annual tax return, including detailed financial schedules, filed by foundation.
Privacy	Donors may remain anonymous.	Donors may remain anonymous.	Donors may remain anonymous, but directors are disclosed on tax filing.

I have to confess: I appreciate the information, but I see no compelling reason seriously to consider shifting our charitable contributions from the foundations we already operate to a public foundation.

We give substantial sums throughout the year, so our end-of-year, “detention pond” giving doesn’t have to come anywhere close to the 30% of AGI limitation.
Same thing concerning the limitations on contributions of publicly traded securities.
We’re not in a position to make gifts of real estate or closely-held securities. –But we should probably keep the idea in mind should we ever decide to give real estate or shares in our company. . . .
Frankly, the costs associated with the DAFs are actually greater than what we spend in our private foundations. At this time, our legal and accounting fees are minuscule compared to the funds we run through our foundations.

And, finally,

While it is true that our private foundation makes us the occasional (once or twice a year) target of charities who are seeking contributions, we haven’t been bothered by these appeals . . . yet.

Of course, any or all of these situations could change. But the private foundation appears to continue as the way for us to go right now. . . .

^* Two items for which you might appreciate an explanation: 1) what is a detention or retention pond? And, 2) how can a foundation serve such a function?

1. Concerning detention or retention ponds. The term comes from the building industry.

Raw land normally absorbs a fair amount of water during a rain storm or when snow melts. During an exceptionally violent rainstorm, some water may run off the surface into a nearby stream, but most of it will be absorbed directly into the ground. A large building and/or sealed parking lot, however, prevents this kind of absorption on the land it covers. If one builds a building or creates a parking lot, all the water that would normally be absorbed, then, has to run off into land surrounding the sealed area.

A retention or detention pond holds that run-off for transfer at a moderate pace, via pipe, to another area; or it can provide a space for slow absorption of the run-off over time.

Without the pond, however, one’s neighbors’ property would be flooded by the uncontrolled run-off.

2. It is common with closely-held companies not to make distributions of profits to shareholders until the last few weeks of the year. Shareholders, of course, are happy to receive the proceeds, but if large sums are involved, such distributions can make it difficult for the recipients to make the best charitable decisions or most strategic contributions.

Shareholders may not be prepared to write a slew of checks at that particular time of year. Perhaps we don’t have the time to devote to the process. Or we aren’t confident about exactly what charities we want to support. Or
Shareholders may not be able to make as strategic contributions as we might prefer. (For example: Many charities would prefer large donors make matching grant donations rather than direct contributions. They use the promise of funds if the proposed donation is matched as a leveraging device to encourage additional donations by others.)

For whatever reason one may be unable or disinclined to make contributions in the last two weeks of the year to the final charitable causes one wants to support, a foundation–public or private–can act as a detention pond. On the one hand, it is, itself, a charity, so any funds given to the foundation (within the limits noted), will be treated by the IRS as charitable contributions. On the other hand, however, the funds don’t have to be distributed to the final charity until the donor and receiving charity are prepared for the transfer.

^** A COF is, by definition, cause-oriented. It will, then, likely have rules against donors sending funds to charities that support behaviors the COF deems counter to its purpose. Thus, for example, a Christian COF is likely not going to approve a donation to the local GLBT charity . . . anymore than a GLBT COF is likely to approve a donation to Focus on the Family. . . .

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