Do you donate sizeable sums of money regularly? Should you start your own private charitable foundation? Is there a social need you would like to support? If you have answered yes to at least one of these questions, then it might be time to start your own charitable foundation.
The benefits of starting your own charity are many. A private foundation is a charity exempt from taxes. An individual controls and funds it, or a family funds and controls it, depending on your specific setup. You can set up a charitable foundation as an NGO or as a trust.
It all depends on the arrangement you choose. We treat both arrangements the same for tax purposes. This is one of the best ways to leave philanthropic legacies behind.
Grant Making Charity Explained
A grant-making foundation is one of the most common types of foundations. It is a private non-profit organization. Grant-making charities are mostly formed by individuals, married couples, families, and corporations.
We refer to the assets of a private foundation as endowments. These endowments generate an income for the foundation. Endowments are used to fund the operation of the non-profit, as well as make grants.
Private foundations are organizations granted a tax-exempt 501(c)(3) non-profit status. They differ from public charities. A typical non-profit organization makes donations that we refer to these as grants. Then, they make these donations to other charitable organizations.
How To Start a Private Foundation
Starting up a private foundation is not dissimilar to starting up an ordinary business. When setting up a private donation, you need to apply for a federal income tax exemption as well as a license. You would also need to file for federal and state documentation. Tax-exempt organizations would also need to define the structure of your organization before moving forward.
Creating A Charitable Foundation Can Lower Taxes
Giving to a private foundation could help you reduce your annual income taxes by making charitable contributions. By donating to a charitable foundation, you can avoid capital gains tax. But this depends on the contributions made.
Giving to a private foundation will also lower your estate taxes. Or it could eliminate them altogether. At Saddock Wealth, we help you set up a charitable foundation and show you how to thrive in a tax-advantaged environment. Your future generations could continue your philanthropic efforts.
What Are the Pros and Cons of Starting a Charitable Foundation?
But as with most things in life, there are advantages and there are disadvantages. The advantages of starting a charitable foundation are many. However, there are certain disadvantages to consider as well.
Some Advantages of Organized Giving
Firstly, with a charitable foundation, you can give in an organized, targeted way. We refer to this as effective philanthropy.
You can expand your giving through a charitable foundation. Individuals cannot claim charitable deductions for grants made to charities, non-profits, or other individuals. Individuals, however, can make tax-deductible donations to a family foundation. You are eligible for tax deductions once you have followed the correct IRS procedures.
Deduct but still be in control. Another advantage is that you will remain in control of your investment and still donate to your own family foundation. As the trustees of your family foundation, you will have the final say in how you dispose of gifting.
Control and sheltered income go hand in hand. Investment income held by the trustees of the foundation is exempt from taxes (except for a % of excise tax).
You will also be able to give regularly. Foundations can accumulate a percentage of their funds under normal conditions. A charitable foundation can decide whether to hold on to these accumulated funds or distribute them. Consistency is helpful to recipients relying on funding.
Another advantage is that you can receive compensation for services rendered. Family members could, under normal circumstances, receive reasonable payment for their services.
Additionally, you can put in claims for travel and other expenses. The foundation could pay for claims for visits to sites and other expenses incurred. It could make these payments to the trustees, employees, and family members.
You can also enjoy double capital gains tax benefits. No capital gain is due when properties are donated to the foundation. Donors can claim deductions for the entire market value of appreciated stock held in publicly traded companies.
Plus, there is the option of exemption and reduction of estate taxes. Usually, a family foundation is exempt from estate taxes.
And then there is the If privacy is at the top of your list, referrals to a family foundation could protect you from continuous fund-raising requests. If recognition and prestige are what you want from your grant-making, a charitable organization could be exactly what you need.
The Disadvantages to Starting a Private Foundation
On the other hand, a charitable foundation takes time, commitment, and effort. It also costs money and you will need an attorney and an accountant to set up your charity.
Also, you will have to pay an annual excise tax on the foundation’s net investment income. This covers the costs incurred by the government for the regulation of a private foundation.
Furthermore, you will need to keep records. All grants and donations should be documented. Meetings and minutes of meetings take time. You will need to dedicate a certain number of hours for meetings and minute taking.
Rules To Follow
Finally, you will be required to stick to specific regulations. Private foundations are required to distribute no less than 5% of their net annual investment, in the form of charitable grants. We refer to these as minimum distribution requirements.
Saddock Wealth Is Here To Help
There are few things that affect as many areas of your life as your wealth. Treat it with the attention it deserves, and it will repay the favor. We show you how to get your non-profit organization up and running. Achieve the tax-exempt status you deserve while still furthering your philanthropic goals.
At Saddock Wealth, we bring years of wealth management experience to the table and can help guide you toward financial prosperity. Above all, make sure your wealth is in the right hands and ready to grow in 2022. The benefits of philanthropy are endless.
Schedule a meeting here to discuss your best options regarding charitable foundations.