A private foundation is a nonprofit organization established for charity. It differs from public charity, which relies solely on external funds to run programs. An individual, family, or corporation can start a private foundation. It's a flexible philanthropic vehicle with several benefits over individual giving.
One of the main reasons for charitable giving is the tax benefits. Individual donors, too, can receive tax deductions, but they must apply for them at the end of the year. Foundations, on the other hand, receive deductions immediately after they're funded.
Carnegie, Rockefeller, and Ford were industry titans. They are remembered not for their business acumen but for the mark their giving - through foundations - is making on humanity. That's because foundations, unlike direct giving, perpetuate the giver's generosity well past their lifetime. Gifts from foundations are from revenue-generating endowments, meaning they surpass individual giving.
Foundations get families involved in ways individual giving may not. They provide a platform for family members of different generations to pursue a common goal. Foundations are also a chance to uphold family traditions and transmit family values. With solo giving, the desire to give may end with the giver's passing.
Foundations and wealthy individuals often receive requests for financial support from various organizations and causes. Declining such requests can be difficult. However, because private foundations have boards that must approve funding, one can side-step unsolicited requests guilt-free. Focusing a foundation on a specific cause helps deter irrelevant funding requests.
Private foundations can invest in other organizations, generating revenue for other philanthropic efforts. They can also make loans instead of grants, which are called Program-Related Investments (PRIs). For example, a private foundation could give a loan to a business employing veterans or people with disabilities. Individual givers may not participate in PRIs.
Private foundations are not without downsides. Initial time commitment costs and administrative responsibilities can be off-putting. Moreover, private foundation owners must take full responsibility legal and financial responsibility for their foundations. Individual giving allows one to make a mark without necessarily getting involved in the day-to-day running of the recipient organization.
For individual givers wanting some control over their contributions without the administrative responsibilities that come with running a private foundation, a donor-advised fund (DAF) is a good alternative. A DAF allows an individual donor to establish a giving account for charitable contributions.
DAFs, like private foundations, have already received tax deductions, giving individuals the leeway to contribute as they deem fit. While a DAF requires a minimum contribution of $250,000, setting up a private foundation may demand at least $2 million.
Another option is to give through public foundations or not-for-profit organizations. Donors wishing to exercise greater control may donate restricted. Restricted giving is where a donor stipulates how the recipient organization should use the money.
Choosing the right philanthropic vehicle can be just as critical as deciding which causes to support. While individual giving is ideal for time and resource-starved individuals and organizations, it can be limiting. Solo givers only get to control how their donations are used when they give restricted. Private foundations may be resource and time-intensive, but owners can choose where their dollars will do the most good.
