Private Foundation Options

Some clients may want to create a vehicle that allows them to have long term involvement with their charitable assets. The Community Foundation welcomes the opportunity to consult with you and your clients who may be considering a private foundation.

Community Foundation staff will candidly discuss the advantages and disadvantages of setting up a private foundation. The disadvantages - costs, ongoing administrative burdens, quarterly tax payments, mandatory payout rates, and reduced tax benefits - encourage many individuals and families to search for an alternative. Establishing a named fund or supporting organization at Central Carolina Community Foundation often meets the needs of donors more efficiently and effectively. The creation of a supporting organization allows the donor a greater amount of control without the headaches or administrative burden created by a private foundation.

Comparison with Community Foundations
Establishing a fund with the Community Foundation has some distinct advantages over a private foundation. The Community Foundation knows that when you are talking with each client that you are discussing a very serious subject - money. Your client's money determines how they live, how they support their family, how they will retire, how they are taxed and how they share with others. It also says a lot about how hard they have worked and how committed they are to making good decisions.

We take the responsibility of an investment with us as an honor, and we continually do all we can to ensure that professional advisors and donors are happy with fund service and how the money is distributed. To that end, below you will find a list of the advantages of establishing a fund with Central Carolina Community Foundation rather than creating a private or corporate foundation.

Transferring a Private Foundation
Even if a client has already established a private foundation, they may want to explore the option of transferring their private foundation to an advised fund at the Community Foundation. Through transferring the assets of a private foundation to Central Carolina Community Foundation, clients often enjoy charitable giving that is easier, more flexible and more effective while ensuring the client's mission, name and pattern of charitable giving are maintained in perpetuity.

Community Foundation staff will work with a client in a number of ways to give that client flexibility in their charitable giving, including setting up meetings with fund advisors and successors, managing competitive request for proposal processes, reviewing proposals, etc.

Several options exist for a client that would like to transfer a private foundation to be served by the Community Foundation.

The Donor Advised Fund Option
The assets of a private foundation could be used to establish a donor advised fund, field of interest fund, unrestricted fund, or designated fund at Central Carolina Community Foundation. With this option, the private foundation Board of Directors could become advisors to the fund and thereby work with Community Foundation staff to set priorities for grantmaking and request specific grant disbursements to be made. Staff would then handle the administrative burden associated with the wishes of the Board of Directors.

Supporting Organization Options

Steps to Terminate a Private Foundation and Transfer Assets to a Fund at the Community Foundation
It is a fairly simple process to terminate a private foundation and create a fund at Central Carolina Community Foundation. A private foundation will be terminated if it distributes all of its net assets to a Community Foundation fund. There is no need to notify the IRS in advance. However, there is a final income tax return that the private foundation must file. The transfer must be of all rights, title and interest to all of its net assets.

If the private foundation is liable for any taxes, the liability carries over to the Community Foundation. While the contribution to the Community Foundation cannot have any material restrictions, it is not a material restriction for the Community Foundation to pay these taxes. (see section 507 of the Internal Revenue code and related Treasury Regulations). Consequently, the fund at the Community Foundation established with the transfer of the private foundation's net assets can be charged with any taxes or other obligations associated with the private foundation.

Services to a Private Foundation
The Community Foundation can provide administrative assistance to donors who have established and wish to maintain private foundations. We work closely with the trustees of private foundations to customize services that meet their needs through a contractual arrangement that is negotiated according to the level of services requested.

For example, our services include:

• Grant review, administration and management
• Record keeping to maintain compliance with state and federal tax laws
• Accounting and other related services including preparation of annual tax returns
• Research on nonprofit organizations in the community
• Data on community needs as determined through the Greater Columbia Community Indicators Project

By using the Community Foundation, private foundations can:

• Reduce the administrative burden for the private foundation staff
• Reduce costs associated with maintaining a dedicated administrative staff
• Focus grant making through the use of the Community Foundation's expert professional staff
• Provide continuity in grant making over time
• Preserve the charitable purpose and visibility of the donors

The best way to start utilizing Community Foundation services is by establishing a donor advised fund in the name of the private foundation. The Community Foundation's status as a public charity means that grants made to it by the private foundation constitute qualifying distributions which fulfills the private foundation's expenditure responsibility. A donor advised fund also allows continued involvement in the distribution of grants from the named fund. The trustees of the private foundation reserve the right to make specific recommendations regarding the charitable distribution from the fund's investment income as well as principal. The private foundation will receive recognition for grants disbursed from the fund or, if the trustees prefer, can remain anonymous.

Services Available

1. Year-end excise tax planning. You determine that, with some additional qualifying distributions, you may reduce your excise tax from 2% to 1%. However, no specific charitable organization or program has been approved. You may contribute those additional qualifying distributions to your donor advised fund at the Community Foundation. Those funds are then available in future periods for your charitable use.
2. Level the private foundation's peaks and valleys in grant making. In years of low qualifying distributions, your foundation may want to add more to its fund as a way of maintaining the favorable 1% excise tax rate. In years of high grant activity, you may utilize your donor advised fund to supplement your foundation's grant disbursement activity, without dramatically increasing your foundation's average pay-out ratio.
3. Accumulate funds for a long-term program or commitment. Your foundation may set aside funds as qualifying distributions. However, several rules must be followed, including obtaining IRS approval by the end of the tax year in which the amount is to be set aside. An alternative is to use your donor advised fund at the Community Foundation. Contributions to your fund are qualifying distributions, and you may accumulate contributions for a specific charitable organization over a period of years.
4. Grants from a donor advised fund can be made anonymously in the name of the Community Foundation. This may be helpful if the trustees desire to fund worthwhile but controversial charitable causes without public fanfare.
5. Deposit program related investments (PRI) which are returned to your foundation. PRI paybacks are generally added to the private foundation's regular minimum annual distribution requirements. By using a donor advised fund, these returned PRI paybacks can be deposited with the Community Foundation without increasing the private foundation's minimum distribution requirement.
6. Manage Excess Business Holdings. If a private foundation has excess business holdings, IRC Section 4943 imposes an initial tax of 5% on the value of the excess business holdings. If the private foundation does not dispose of the excess by the end of the taxable year, it is subject to a punitive 200% tax on the excess value. If a private foundation receives the stock by gift or bequest, the tax is not imposed until five years (ten years with an IRS extension) after it received the stock.

Because the Community Foundation is a public charity and not subject to private foundation excise taxes, closely-held stock is an attractive source of gifts. A named fund at the Community Foundation can hold such stock for more than five years without triggering the tax. This can give a business more time to redeem the stock, which can ease the cash-flow crunch.

If you have any questions contact J. Larry Snipes, Director of Development, at 803.254.5601 ext. 322 or larry@yourfoundation.org.