Private foundations can be a powerful way for individuals or families to create a philanthropic legacy. However, for some the management of a private foundation (hiring staff and investment managers, running a grant making program, fulfilling legal/reporting requirements) becomes unmanageable.
For those who want to experience the joy of making a difference while retaining their ability to recommend charitable grants and leave a named legacy, a private foundation transfer to a donor advised fund at the Portage Foundation could be the answer.
The chart below explains the advantages of a community foundation, such as the Portage Foundation, versus a private foundation.
The Portage Foundation
Private Foundation
Ease of Creation
Execution of simple Fund Agreement is all that is required.
Involves creation of a new organization, application for tax-exempt status, and expenditure of time and money.
Tax Benefit
Taxpayer can deduct up to 60% of adjusted gross income for cash gifts.
Full market value of gifts of appreciated property is deductible up to 30% of adjusted gross income. (Consult your tax advisor concerning alternative minimum tax implications.)
Cash gift deduction is limited to 30% of adjusted gross income. Only the cost basis of certain types of appreciated property is deductible, and deduction is limited to 20% of adjusted gross income.
Accounting and Tax Preparation
No separate tax return to file, and assets are audited as part of the Foundation’s annual audit.
Detailed reporting required.
Excise Taxes
No excise tax to pay.
A 1-2% federal excise tax must be paid on net investment income.
Investments
No federal investment requirements, and no equity concentration restrictions other than those established through prudent guidelines. (Information on the Foundation’s investment policies, managers, consultants, fees and performance is available upon request.)
Certain types of investments prohibited, and the Foundation may not own more than 20% equity interest in a business.
Ongoing Costs
Fund is charged an administration fee of 1.5%
Cost of operating could include staff, investment managers, tax consultants, etc.
Required Distributions
None
5% of assets annually
Anonymity
Donors’ names are revealed only to the IRS.
Names and addresses of contributors must be made available to the public.
Reporting Requirements
Handled by Portage Foundation
Annual IRS Form 990-PF must be made filed and made available to the public
Staffing
Professional staff can screen giving opportunities and stay abreast of community needs with maximum convenience and low cost.
Any staffing must occur within federally mandated self-dealing rules.
Accounting & Liability
Donors may remain anonymous if they choose. Portage Foundation is accountable for management of funds.
Donors are named on the 990-PF. Board is responsible for complying with regulations.
Perpetuity
Carrying out the donor’s charitable intent is an important hallmark of community foundations.
Over time, oversight will change and your wishes may be forgotten.
Transferring a Private Foundation to the Portage Foundation
If you are interested in transferring your private foundation to a donor advised fund, below are the primary required steps. You or your advisors are encouraged to call us with questions.
- Board Approval
Once the Portage Foundation consents to accepting a transfer of your private foundation assets, your governing board can approve the transfer to a donor advised fund according to the provision of your governing documents (i.e., bylaws, articles of incorporation and/or declaration of trust) and applicable state law. - Fund Set Up
You create a donor advised fund by completing a fund agreement provided by the Portage Foundation in which you name the fund and name current advisors and successor advisors. - Manage Your Liabilities
Pay private foundation’s outstanding taxes, grants, debts, etc. before transferring assets to the Portage Foundation. Create a reserve for any other anticipated expenses. Once assets are transferred to a donor advised fund, they can be granted to charitable projects and organizations but they cannot be used to cover the private foundation’s past expenses and obligations. - Corporate or Trust Dissolution
Once the transfer to the Portage Foundation is approved by the board, the fund is set up with the Foundation and liabilities managed – but before transfer of assets – if the private foundation is a nonprofit corporation then it should file a corporate dissolution with the Secretary of State or other applicable staff office depending on the state. If the private foundation is a trust, then a local court of appropriate jurisdiction should approve the dissolution of the trust and transfer to the Portage Foundation. - Asset Transfer
The Portage Foundation is a public charity, so it can receive a donation of the private foundation’s assets by simply writing a check. The donor advised fund can also accept gifts of stock, mutual funds, personal property and more. - Final Tax Filing
The final 990-PF is filed reporting the dissolution of the private foundation, attaching a copy of the court order (if trust) or dissolution document (if nonprofit corporation) as well as the new donor advised fund agreement with the Portage Foundation. Schedule O may be used to explain the timing and other details of the dissolution and transfer.
IMPORTANT SCHOLARSHIP NOTE: If the private foundation operated a scholarship fund that it wants the Portage Foundation to continue in addition to other charitable grant making, then the Portage Foundation would have to separate assets transferred for the scholarship fund from assets transferred for the donor advised fund, and a separate scholarship fund agreement made. Donor advised funds cannot award scholarships.
Section 507 of the Internal Revenue Code
Section 507 permits termination of a private foundation in either trust or corporate form with distribution of its assets to a public charity. The two primary requirements for the termination of a private foundation are that the private foundation must distribute all of its net assets to one or more tax-exempt organizations and that the organization receiving the assets must have been in continuous existence for at least five years. The Portage Foundation fulfills both of these requirements.
This information should not be considered legal or financial advice. Please consult with your financial or tax advisor or your attorney to help you with your private foundation transfer.
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