Private foundations are charitable giving vehicles established by individuals or families.
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For example, the Bill and Melinda Gates foundation has more than $38 billion in assets and is the Gates family's primary way of giving back to society. Although your foundation probably won't be quite as big, it will still function in a similar way.
But foundations aren't always the best way to achieve your family's philanthropic goals. While there are some distinct advantages in starting a private foundation, there are also some drawbacks and limitations you should be aware of.
Examining Your Purpose
Before you decide whether or not a private foundation is right for you, you need to consider why you want to start a private foundation in the first place. Is your motivation for starting a foundation simply to donate funds to charity? If so, there are more efficient ways to make charitable donations.
If you decide to go ahead with starting a private foundation, your initial steps will be to consider several fundamental questions including: (1) How involved do you want to be in the foundation?, (2) How long do you want your foundation to last?, (3) What are the potential tax consequences of a foundation?, and (4) What is the social cause you want your foundation to fund?
Foundations require substantial administrative oversight. Think about who will be responsible for receiving funding requests, monitoring compliance, and handling a hundred other tasks that are part of the territory with a private foundations. If your foundation has less than $5 million in assets, it's not worth hiring even a part-time staff person. A better option might be to bring your foundation in under a larger philanthropic organization like a community foundation.
If a private foundation isn't appropriate for your goals and circumstances, you still have several options at your disposal.
- Direct donations -- Continue to contribute directly to charities.
- Donor advised funds -- individual giving accounts that are established through community foundations and enable you to offer advice about how funds will be distributed.
- Planned giving -- gifts, bequests, and grants that are part of your estate.