Overview
A private foundation is a charitable organization, usually funded by one individual or family, that supports charitable causes primarily through grants. It is typically organized as a New York not-for-profit corporation or as a charitable trust, and it applies to the IRS for recognition of tax-exempt status under Section 501(c)(3).
Unlike a gift made directly to a public charity, a foundation keeps the family involved over time. Family members can serve as directors, set the foundation’s mission and grant policies, and decide which organizations to support each year. For many families, the foundation becomes a way to involve children and grandchildren in shared values across generations.
How a Private Foundation Works
The donor contributes cash, securities, or other assets to the foundation and may receive an income tax charitable deduction. The foundation invests the assets, pays a modest excise tax on its net investment income, and makes grants to qualified charities. Each year, it must distribute at least 5% of the value of its investment assets for charitable purposes.
Deductions for gifts to a private foundation are subject to lower percentage-of-income limits than gifts to public charities. Gifts of cash are generally deductible up to 30% of adjusted gross income, and gifts of publicly traded stock held for more than one year are generally deductible at fair market value up to 20%. Gifts of other property, such as closely held business interests or real estate, are generally deductible only at their cost basis. Deductions above these limits can be carried forward for up to five years.
Forming a Foundation
Formation typically involves:
- Choosing the structure. A not-for-profit corporation or a charitable trust, each with different governance and liability considerations.
- Organizational documents. A certificate of incorporation or trust agreement, bylaws, and a conflict of interest policy.
- Tax-exempt status. Obtaining an employer identification number and applying to the IRS for recognition of exemption on Form 1023.
- State registration. Registering with the New York State Attorney General’s Charities Bureau.
- Policies. Governance, investment, and grant-making policies that reflect the family’s goals.
Ongoing Administration and Compliance
Private foundations are subject to strict federal rules, and penalty excise taxes can apply to the foundation and, in some cases, to its managers and insiders:
- Self-dealing. Most transactions between the foundation and its substantial contributors, directors, officers, and their family members are prohibited, even on fair terms.
- Minimum distributions. At least 5% of investment assets must be distributed for charitable purposes each year.
- Excess business holdings. The foundation and its insiders together generally may not own more than 20% of the voting stock of an operating business.
- Jeopardizing investments. Foundation assets must be invested prudently.
- Taxable expenditures. Grants must serve charitable purposes, and grants to individuals or to organizations that are not public charities require advance procedures.
- Annual filings. Form 990-PF with the IRS and annual financial reports to the New York Charities Bureau.
When separately engaged, we advise foundations on board governance, bylaws and policies, grant agreements, compliance with the private foundation rules, and planning for the next generation of family leadership, and we coordinate with the foundation’s accountants on its annual filings.
Private Foundation or Donor-Advised Fund?
A donor-advised fund is a simpler alternative: an account at a sponsoring public charity from which the donor recommends grants. The right choice depends on how much control the family wants, the assets being given, and the family’s long-term philanthropic goals. Some families use both.
| Private foundation | Donor-advised fund | |
|---|---|---|
| Control | The family directs investments and grants through the board | The donor recommends grants; the sponsoring charity makes the final decision |
| Deduction limits for cash and appreciated public stock | 30% and 20% of adjusted gross income | 60% and 30% of adjusted gross income |
| Annual distribution requirement | At least 5% of investment assets | None required by federal law |
| Privacy | Form 990-PF is public, including grants | Grants can be made anonymously |
| Cost and administration | Formation costs and ongoing legal, accounting and filing work | Minimal |
Considerations
- Cost and administration. A foundation carries ongoing legal, accounting, and administrative costs, so it is best suited to significant, long-term philanthropy.
- Public disclosure. Form 990-PF is publicly available and shows the foundation’s assets, grants, and any compensation paid.
- Funding with closely held interests. The cost basis deduction rule and the excess business holdings rules make these gifts more complex; a charitable lead or remainder trust may be a better fit.
- Family governance and succession. Decide in advance how future generations will join the board and how disagreements will be resolved.
- Recent tax changes. Beginning in 2026, new rules affect the value of charitable deductions for some taxpayers, so funding plans should reflect current law.