Foundation donors and trustees assume important obligations when these institutions are created. When families have multiple giving vehicles—foundations, donor-advised funds, and family businesses—supporting their charitable goals, it is tempting to view a foundation’s assets as yet another source of philanthropic dollars, especially when it’s all benefiting charity. But as John Edie, Director of Exempt Organizations Tax Services at PricewaterhouseCoopers writes:
Whether the donor to a private foundation is an individual, a family, or a for-profit company, it is important to understand that once cash or other assets are gifted (or bequeathed) to a private foundation, those assets then belong to a separate legal entity that is subject to many restrictions. Said as plainly as possible:
“It’s not your money anymore.”
Once you decide to create a family foundation, you will encounter a number of legal requirements: crafting the governing instruments that will explain the charitable purposes and governance of your foundation, obtaining tax-exempt status from the Internal Revenue Service and the attorney general or secretary of state in your state, choosing the assets with which to fund your foundation, and, finally, staying out of trouble.
You will need to meet annual reporting and payout requirements, pay taxes on net investment income, avoid taxable acts of “self-dealing” with so-called “disqualified persons,” anticipate grants that require expenditure responsibility, keep important records, and more.
Donor-advised funds and supporting organizations have their own restrictions and pitfalls. These important giving vehicles witnessed significant changes with the passage of the Pension Protection Act in 2006.
For more information on these important legal requirements, see the resources below.
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