Donors and families who establish private foundations often have a variety of issues they care about, and are looking for a vehicle that gives them the flexibility to make a wide variety of choices on where to invest their philanthropic assets with other members of their families across multiple generations.
Some donor families begin with – or identify over time – a more direct vision for what they wish to accomplish. They may decide to use the majority of their charitable dollars to create and manage programs and services for a particular neighborhood, or they may wish to develop, support and conduct original research on a specific area of interest.
For the latter category of donors, the private operating foundation may be the preferred choice of charitable giving vehicle. Private operating foundations are a special form of private foundation which uses the bulk of its income to actively run its own charitable programs or services. Examples include the operation of a museum, library, research facility or historic property.
The IRS distinguishes between public and private foundations and, within private foundations, between operating and non-operating (grant-making) foundations. While private operating foundations may choose to make some grants to other charitable organizations, they must engage primarily in direct charitable activities by running their own programs (i.e., using their own facilities, staff and resources to directly further their charitable operations).
Requirements for Private Operating Foundations
Although operating foundations are given freedom to directly use their assets, the IRS mandates that 85% of the foundation’s assets are to be used for tax exempt activities. To ensure this, all private operating foundations must pass one of the following tests:
- Assets test: the foundation must use 65% of their assets to actively conduct exempt activities.
- Endowment test: the foundation must make a contribution that is two-thirds of the minimum investment of return towards exempt activites.
- Support test: at least 85% of its financial support must come from the general public and 15% from unrelated exempt organizations.
Meeting these tests each year can be difficult for families with diverse funding interests, and it is critical that you understand these requirements before exploring the private operating foundation alternative. Complete description of these important tests are available from the IRS.
Reasons Some Families Use Private Operating Foundations
A key advantage of the operating foundation model is that it allows the founding donor or family to invite others to contribute to its endowment for the programs or services it supports, and for these other investors to receive the same tax benefits as for gifts to a public foundation.
Other reasons that donors and families may choose to establish a private operating foundation include:
- An interest in managing activities that are directly aligned with your philanthropic mission
- A desire to engage directly and regularly with the community you serve
- An interest in encouraging others’ investment in your philanthropic mission, and in leveraging your family’s investment
Examples of Family Foundations Using the Operating Foundation Vehicle
According to the Planned Giving Design Center, as of August 2018 there were approximately 97,500 U.S. private foundations with 8,600 of these, less than 9%, established as private operating foundations (and nearly three-fourths of these having assets of less than $1 million). Many of these vehicles are established by, and continue to be guided by, philanthropic families and individual donors. Examples of just a few family foundations functioning as private operating foundations include:
The Bainum Family Foundation supports educational programs and projects assisting underserved children and youth, from early childhood through post-secondary education, primarily in the Washington, D.C. metropolitan areas.
The H. E. Butt Foundation is an operating foundation with five primary programs located near the headwaters of the Frio River just north of Leakey, Texas: the H. E. Butt Foundation Camp, Laity Lodge, Laity Lodge Youth Camp, Laity Lodge Family Camp, and the H. E. Butt Outdoor School. The Foundation also continues to explore new initiatives to serve vulnerable communities in San Antonio and the Texas Hill Country.
The Cummings Foundation, based in Woburn, Massachusetts operates four operating entities, including the Cummings $20 Million Grant Program, the Institute for World Justice, the Cummings School of Veterinary Medicine at Tufts University and New Horizons.
The Lincoln Institute of Land Policy seeks to improve quality of life through the effective use, taxation, and stewardship of land. A nonprofit private operating foundation whose origins date to 1946, the Lincoln Institute researches and recommends creative approaches to land as a solution to economic, social, and environmental challenges. Through education, training, publications, and events, we integrate theory and practice to inform public policy decisions worldwide.
The Flintridge Foundation in Los Angeles has worked for more than 25 years to address issues of disparity that impact the lives and futures of young people in Northwest Pasadena and Altadena. In 2007 the Foundation converted to a new entity, the Flintridge Operating Foundation, and in 2010 the foundation changed it’s name to the Flintridge Center and updated it’s mission statement to reflect its new approach.
The Binning Family Foundation is a private operating foundation located in Littleton, Colorado. The Foundation was created to design and operate programs that directly improve the quality of life for Colorado youth by supporting their personal development.
The Orton Family Foundation works with with selected towns in New England and the Rocky Mountain West through its Community Heart and Soul Network to plan for growth and change that preserves and enhances community character.
The Hogan Family Foundation, based in Newbury Park, California, was established in 1998 by the founders of the largest tour operator serving Hawaii. The foundations mission is to promote the entrepreneurial spirit through the creation and operation of educational, civic-minded and humanitarian programs designed to encourage a more productive and contributory society.
The Doris Duke Charitable Foundation has an ongoing relationship with a number of operating foundations and related entities that were established in accordance with Doris Duke’s will.
Additional Resources on Private Operating Foundations
For the right family, private operating foundations can be a powerful vehicle. To learn more, start by reviewing the IRS description of private operating foundations or Hurwit & Associates’ FAQ on Private Operating Foundations.
Editor’s Note: The information in this article should not be taken as qualified legal advice. Please consult your legal advisor for questions about specific legal issues discussed here. The information presented is subject to change, and is not a substitute for expert legal, tax, or other professional advice. This information may not be relied upon for the purposes of avoiding penalties that may be imposed under the Internal Revenue Service.