Since 1968, every Section 501(c)(3) organization is classified by the IRS as either a private foundation or a public charity. This classification is crucial for at least two reasons to anyone considering forming a nonprofit or anyone considering making a significant donation to a nonprofit.
First, private foundations are subject to much stricter regulations than public charities. Second, public charities receive more favorable tax treatment than private foundations. Let’s explore each classification a little deeper.
Public Charities
Public charities must attract broad donor support. Some organizations—churches, schools, and hospitals for instance—are by their very nature considered “publicly supported.” Other organizations must pass mathematical public support tests to qualify as a public charity. These tests require charities to obtain funding from numerous sources, rather than one singular source, or a small group of related funders.
When a charity passes one of the public support tests, it is demonstrating to the IRS that the general public (non-insiders) evaluated the charity’s performance and found it worthy of financial support. As a result, such charities are treated as having a sort of stamp of approval of the general public, lessening the need for the stricter IRS scrutiny applied to private foundations.
Private foundations are subject to a more strict regulatory scheme than public charities. There are penalties for self-dealing transactions, failure to distribute sufficient income for charitable purposes, holding concentrated interests in business enterprises, and making risky investments. The IRS recognizes two types of private foundations: private non-operating foundations and private operating foundations. The main difference between the two? How each distributes its income:
Private nonoperating foundations grant money to other charitable organizations.
Private operating foundations distribute funds to their own programs that exist for charitable purposes.
In general, private foundations can accept donations, but many do not and instead have endowments, as well as invest their principle funding. The income from the investments is then distributed for charitable activities/operations.
Deduction limits
Contributions made to public charities and private foundations may be deducted from the donor’s federal income tax. The amount of the deduction is subject to certain limits under federal tax law.
Gifts to public charities receive more favorable tax treatment than gifts to private foundations—this includes donor limits. For example, a charitable cash donation to a public charity would be deductible at up to 50 percent of the taxpayer’s adjusted gross income (AGI), but the same gift to a private foundation is deductible at a rate of only 30 percent of AGI.
A word on the word “foundation”
Don’t assume that an organization with “foundation” in its title/name is indeed a private foundation and not a public charity. Of course, it could be, but many types of nonprofit organizations have adopted “foundation” as part of their name to help project a mission and/or identity. (Examples include Friends of Animal Center Foundation and the Iowa City Public Library Friends Foundation.) If you’re entirely unsure if a nonprofit you’re considering donating to is a private foundation or public charity, simply ask one of the nonprofit’s executives or appropriate contact.
If you’re wanting to make a complex gift or include nonprofits as beneficiaries in your estate plan it’s wise to work with an attorney experienced in those areas. Of course, I would be happy to help.
Have any questions? Want to discuss your charitable donation or formation of your dream nonprofit? Contact me by email or phone (515-371-6077) .
https://www.gordonfischerlawfirm.com/wp-content/uploads/2015/05/josh-boot-177342.jpg38405760Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2018-10-27 05:50:142020-05-18 11:28:50What's the Difference Between Public Charity & Private Foundation
Here’s an example of a presentation I gave in a workshop open to the public, entitled “Basics of Estate Planning.” This presentation on clauses to include in an executive’s contract was focused toward a different audience—nonprofit employers. And just in case those samples weren’t enough, here’s a presentation I gave to my fellow estate planners on effectively including digital assets in plans. Of course, I modify my content so it’s applicable to the event, organization, and audience.
So, if you’re in need of a speaker on any topic related to my core services, don’t hesitate to shoot me an email at gordon@gordonfischerlawfirm.com or give me a call at 515-371-6077 to discuss your upcoming event and potential speaking topics.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/gordon-fischer-speaking.jpg685960Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2018-10-24 10:57:262020-05-18 11:28:50Need a Speaker? Drop Me a Line!
Pull out those lucky golden tickets because the Mega Millions lottery jackpot has reached a record $1.6 billion. (The Powerball isn’t too shabby either, at $620 million). Undoubtedly, we’ve all daydreamed about what we would do with cash like that. Maybe your dream is jet setting, paying off debt (and then some), funding educations for your entire family, building a swank mansion stocked with Teslas…but, let’s bring it back to reality for a moment and talk about two perfectly practical and important things you SHOULD add to that list if you’re suddenly a Mr./Mrs. Money Bags.
Undoubtedly, if you come into massive wealth everyone is going to come out from the woodwork to try and get a piece of it. It’s great to share your winnings with the people and causes you care about, but you definitely don’t want fraudsters, scammers, or thieves looking to swoop in a take a piece of the pie. One of the best ways to protect your cash is by founding a private foundation. After you win, donate the money to your newly founded [Insert Your Name Here] Family Foundation of which you can serve as the executive director.
This is a smart move on multiple advisable fronts. For starters, because a private foundation is a charitable organization, you minimize your personal tax liability greatly. Furthermore, and more importantly, you get to use your endowed Foundation to support your charitable passion projects, help your community, and solidify a reputation for being an influential philanthropist. (Inspirational speaker circuit anyone?)
The private foundation, with its sound investment policies, is also a good way to have the principle grow significantly over time.
With a private foundation, you can serve as the executive direction and then hire family members and friends to essential administrative roles. Wondering how you actually “see” any of that money you transferred to your foundation? Salaries for such positions can be established based on private foundations of a similar size and wealth, so you can expect at least “enough” for an affluent life.
When founding a private foundation, enlisting an experienced nonprofit attorney is a must. Have your attorney advise on the IRS regulations you need to adhere to like filing the appropriate documents, refrain from political donations, and adopt important good governance policies and procedures. Additionally, you’ll want to avoid self-dealing like the plague! That means you can’t use foundation funds for your personal benefit, even if you founded it, because the foundation is completely separate different legal entity with a governing board of trustees who owe the foundation a fiduciary duty.
There is much more to be said on the minutia of forming a compliant, successful private foundation, but we’ll save that for a future post! In the meantime, if you have questions, don’t hesitate to contact me!
You don’t need to be a lottery winner to establish a charitable organization (private or public)! With a mission, vision, and the tenacious drive to make an impact, you can form your own organization at any time if you follow the proper process. I’d love to help make your estate planning goals and charitable organization dreams happen at any asset level. Schedule your free consult or drop me a line via email or phone (515-371-6077).
https://www.gordonfischerlawfirm.com/wp-content/uploads/2018/10/Screen-Shot-2018-10-24-at-1.16.07-AM.png6781026Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2018-10-23 01:27:332020-05-18 11:28:50You Won the Lottery! Here's What You Should Do Now
What’s the Difference Between Public Charity & Private Foundation
Charitable Giving, Nonprofits, Taxes & FinanceSince 1968, every Section 501(c)(3) organization is classified by the IRS as either a private foundation or a public charity. This classification is crucial for at least two reasons to anyone considering forming a nonprofit or anyone considering making a significant donation to a nonprofit.
First, private foundations are subject to much stricter regulations than public charities. Second, public charities receive more favorable tax treatment than private foundations. Let’s explore each classification a little deeper.
Public Charities
Public charities must attract broad donor support. Some organizations—churches, schools, and hospitals for instance—are by their very nature considered “publicly supported.” Other organizations must pass mathematical public support tests to qualify as a public charity. These tests require charities to obtain funding from numerous sources, rather than one singular source, or a small group of related funders.
When a charity passes one of the public support tests, it is demonstrating to the IRS that the general public (non-insiders) evaluated the charity’s performance and found it worthy of financial support. As a result, such charities are treated as having a sort of stamp of approval of the general public, lessening the need for the stricter IRS scrutiny applied to private foundations.
Private Foundations
Private foundations are funded by an individual, a family, a company, or a small group. Two prominent examples would include the Ford Foundation and Bill & Melinda Gates Foundation.
Private foundations are subject to a more strict regulatory scheme than public charities. There are penalties for self-dealing transactions, failure to distribute sufficient income for charitable purposes, holding concentrated interests in business enterprises, and making risky investments. The IRS recognizes two types of private foundations: private non-operating foundations and private operating foundations. The main difference between the two? How each distributes its income:
In general, private foundations can accept donations, but many do not and instead have endowments, as well as invest their principle funding. The income from the investments is then distributed for charitable activities/operations.
Deduction limits
Contributions made to public charities and private foundations may be deducted from the donor’s federal income tax. The amount of the deduction is subject to certain limits under federal tax law.
Gifts to public charities receive more favorable tax treatment than gifts to private foundations—this includes donor limits. For example, a charitable cash donation to a public charity would be deductible at up to 50 percent of the taxpayer’s adjusted gross income (AGI), but the same gift to a private foundation is deductible at a rate of only 30 percent of AGI.
A word on the word “foundation”
Don’t assume that an organization with “foundation” in its title/name is indeed a private foundation and not a public charity. Of course, it could be, but many types of nonprofit organizations have adopted “foundation” as part of their name to help project a mission and/or identity. (Examples include Friends of Animal Center Foundation and the Iowa City Public Library Friends Foundation.) If you’re entirely unsure if a nonprofit you’re considering donating to is a private foundation or public charity, simply ask one of the nonprofit’s executives or appropriate contact.
If you’re wanting to make a complex gift or include nonprofits as beneficiaries in your estate plan it’s wise to work with an attorney experienced in those areas. Of course, I would be happy to help.
Have any questions? Want to discuss your charitable donation or formation of your dream nonprofit? Contact me by email or phone (515-371-6077) .
Need a Speaker? Drop Me a Line!
Events, From Gordon's Desk...One aspect of running my own firm that I love is getting out and teaching groups of people. Just like mission, my presentations center on maximizing charitable giving. Be it through estate planning education, nonprofit board training, or sharing tools and resources for professional advisors, I’m always open to speaking at different organizations and events across the state of Iowa.
Here’s an example of a presentation I gave in a workshop open to the public, entitled “Basics of Estate Planning.” This presentation on clauses to include in an executive’s contract was focused toward a different audience—nonprofit employers. And just in case those samples weren’t enough, here’s a presentation I gave to my fellow estate planners on effectively including digital assets in plans. Of course, I modify my content so it’s applicable to the event, organization, and audience.
So, if you’re in need of a speaker on any topic related to my core services, don’t hesitate to shoot me an email at gordon@gordonfischerlawfirm.com or give me a call at 515-371-6077 to discuss your upcoming event and potential speaking topics.
You Won the Lottery! Here’s What You Should Do Now
UncategorizedPull out those lucky golden tickets because the Mega Millions lottery jackpot has reached a record $1.6 billion. (The Powerball isn’t too shabby either, at $620 million). Undoubtedly, we’ve all daydreamed about what we would do with cash like that. Maybe your dream is jet setting, paying off debt (and then some), funding educations for your entire family, building a swank mansion stocked with Teslas…but, let’s bring it back to reality for a moment and talk about two perfectly practical and important things you SHOULD add to that list if you’re suddenly a Mr./Mrs. Money Bags.
Make an Estate Plan
It’s definitely true that estate planning is not just for the wealthy, but that doesn’t mean it’s NOT for the wealthy too! Estate planning is essential for the effective and successful transfer of wealth for high net worth individuals. A quality estate planner will take all assets (from artwork to real estate to investments) into consideration when deciding what strategies, vehicles, and tools to maximize your goals, tax savings for your estate, and solidify your legacy. (You do not want to join the likes of these celebs who passed away without a will!) With a high net worth, you definitely need to consider different types of trusts in addition to how best to practice charitable giving through testamentary gifts.
If you already have an estate plan, that great! But, with a massive influx of wealth you’ll likely need major updates and revisions.
Found a Private Foundation
Undoubtedly, if you come into massive wealth everyone is going to come out from the woodwork to try and get a piece of it. It’s great to share your winnings with the people and causes you care about, but you definitely don’t want fraudsters, scammers, or thieves looking to swoop in a take a piece of the pie. One of the best ways to protect your cash is by founding a private foundation. After you win, donate the money to your newly founded [Insert Your Name Here] Family Foundation of which you can serve as the executive director.
This is a smart move on multiple advisable fronts. For starters, because a private foundation is a charitable organization, you minimize your personal tax liability greatly. Furthermore, and more importantly, you get to use your endowed Foundation to support your charitable passion projects, help your community, and solidify a reputation for being an influential philanthropist. (Inspirational speaker circuit anyone?)
The private foundation, with its sound investment policies, is also a good way to have the principle grow significantly over time.
With a private foundation, you can serve as the executive direction and then hire family members and friends to essential administrative roles. Wondering how you actually “see” any of that money you transferred to your foundation? Salaries for such positions can be established based on private foundations of a similar size and wealth, so you can expect at least “enough” for an affluent life.
When founding a private foundation, enlisting an experienced nonprofit attorney is a must. Have your attorney advise on the IRS regulations you need to adhere to like filing the appropriate documents, refrain from political donations, and adopt important good governance policies and procedures. Additionally, you’ll want to avoid self-dealing like the plague! That means you can’t use foundation funds for your personal benefit, even if you founded it, because the foundation is completely separate different legal entity with a governing board of trustees who owe the foundation a fiduciary duty.
There is much more to be said on the minutia of forming a compliant, successful private foundation, but we’ll save that for a future post! In the meantime, if you have questions, don’t hesitate to contact me!
You don’t need to be a lottery winner to establish a charitable organization (private or public)! With a mission, vision, and the tenacious drive to make an impact, you can form your own organization at any time if you follow the proper process. I’d love to help make your estate planning goals and charitable organization dreams happen at any asset level. Schedule your free consult or drop me a line via email or phone (515-371-6077).