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.
2004
This sample policy from the Wyoming-based Homer A. and Mildred S. Scott Foundation outlines the Scott Foundation's views on foundations and accountability and the board members' responsibilities with regard to that vision.
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September 2002
This list is a good start for private foundations to assure that they're in legal and financial order.
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2002
The South Carolina-based Self Foundation's policy on dealing with potential conflicts of interest between board members and grantees. The Foundation encourages board members to play an active role in the community by serving as board members or other-wise being involved with a wide spectrum of nonprofit organizations.
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2006
This guide outlines the rules on self-dealing governing foundations. It highlights the most common problem areas such as excessive compensation, tickets to fundraising events, and overlapping board members; and recommends steps foundations ought to take to avoid these pitfalls, including regular training, maintaining lists of disqualified persons, and adopting travel and conflict of interest policies.
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2002
This chapter from 'Splendid Legacy' covers a wide variety of important legal issues for family foundations getting started, including: defining your foundation's charitable purposes; obtaining recognition of tax-exempt status; and selected the assets that will fund the foundation. The chapter addresses a number of potential situations to avoid, including self-dealing, jeopardy investments, excess business holdings, meeting the 5% payout requirement, expenditure responsibility, and other areas.
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2002
Describes the duties of care, loyalty, and obedience for the directors or trustees of a private foundation.
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October 2006
On August 17, 2006, President Bush signed the Pension Protection Act of 2006, also known as H. R. 4, into law. (The bill's full text is available here.) Containing a number of unexpectedly added provisions, and designed to encourage charitable giving and curb abuses in the nonprofit sector, the Act came as a surprise to many in the sector and has donors and charities alike trying to make sense of a new regulatory landscape. While some contend the incentives in the bill could encourage more than $1 billion in additional charitable donations, others counter that the Act's limitations will dissuade many donors from taking advantage of them. While some applaud the law's efforts to curb abuses in foundations, donor-advised funds and supporting organizations, others are concerned that more regulation will simply mean more anxiety and more paperwork. With the Treasury Department poised to clarify some of the Act's provisions, and more reform legislation possibly on the horizon, giving families will need to acquaint themselves with the new regulations and prepare for a new regulatory environment.
This month’s Family Giving News is a brief guide to the provisions of the Act and what giving families can do to respond to its passage.
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May 2007
Passed in August 2006, the Pension Protection Act introduced a number of charitable reforms, including new charitable incentives, increases in penalties, and changes to donor-advised funds and supporting organizations. A new year, a new Congress, and an income tax return later, Family Giving News revisits the issue to find out how its provisions are affecting giving families and what new changes may be ahead.
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