The number of private foundations in the United States is nearing 150,000 with combined assets topping $1 trillion, so it’s no wonder people often consider establishing a private foundation when they explore structuring their charitable giving.
Recently, though, the growth of donor advised funds (DAFs) to nearly 2 million in number—with annual grants from these vehicles reaching $50 billion—signals many people are starting to use donor advised funds in addition to, or in place of a private foundation. Some of your clients may even be considering transferring private foundation assets to a donor advised fund to carry out their family’s mission.
Take a moment to skim this checklist to help guide conversations with your clients.
“Reality check” the hassle. Day-to-day management and administration of a private foundation can become time-consuming, especially as responsibilities fall to second- and third-generation family members. Even the first generation may realize administrative work is taking too much focus away from nonprofits, the community, and grantmaking.
Review the tax rules. The IRS’s rules related to investments, distributions, and “self-dealing” are complex. Over time, family members may become frustrated navigating tax compliance. For instance, if a client plans to transfer all or part of a family business, now or in the future, it is critical to understand the benefits of using a DAF at the NoCo Foundation versus transferring the business interests to a private foundation (which can be disastrous from a tax standpoint).
Lean on the NoCo Foundation. Our team is happy to walk alongside you and your client through the steps to terminate a private foundation and move the assets into a donor advised fund. The first step is for the board of the private foundation to approve the termination and capture that approval in meeting minutes or a consent of directors.
Set up a donor advised fund. Your client can establish a DAF at the NoCo Foundation and choose the name (e.g., Smith Family Foundation Fund). Similarly, selection and succession of fund advisors (who will handle grantmaking) can mirror the private foundation’s board structure. As a result, the DAF can look and operate a lot like the private foundation.
Make a grant. The private foundation will distribute (“grant”) most of its net assets to the newly established DAF. The private foundation will need to pay all its liabilities and expenses before accounts are closed, so your clients will want to leave a reserve in the private foundation to cover final bills before completing the termination.
Finalize the termination. As long as the private foundation corporate entity is in good standing according to state laws, termination for tax purposes will be automatic and smooth because assets were transferred to the NoCo Foundation, a longstanding organization. The private foundation will then simply file an informational tax return with the Internal Revenue Service for its final year. Lastly, the private foundation should take any steps required for termination under the laws of all states in which it was registered, especially if the private foundation was organized in corporate form.
Check out this helpful chart comparing charitable giving options to determine the best approach for your clients. Whether your client is ready to transfer a private foundation this year or is simply evaluating options, give us a call. We’re happy to help!
