Tax Benefits of Setting Up a Foundation 

Many nonprofit organizations, individuals, and families reach a point where their success allows them to consider expanding their impact. One powerful way to achieve this is by setting up a foundation. 

A charitable foundation is a tax-exempt organization established specifically to donate money or assets to charitable causes that align with a specified mission. These foundations are governed by a board of directors that oversees the foundation’s grantmaking activities and investment strategies, ensuring the long-term sustainability of your charitable giving. 

Here is a closer look at charitable foundations, who should consider starting one, and the tax benefits that can be had. 

What is a Charitable Foundation? 

At its core, a charitable foundation is an organization with tax-exempt status that has been established with a singular purpose: to donate money or assets to charitable causes. These causes typically align with the mission of the nonprofit organization, individual, or family that establishes the foundation. Think of it as an extension of your charitable efforts, but with a structure that allows for long-term growth and impact. 

There are two main types of charitable foundations: private foundations and public charities. While both are dedicated to charitable giving, the key difference lies in how they’re funded: 

  • Private Foundations: These are typically funded by a single donor or a small group of donors, and their financial resources often come from an initial endowment. 
  • Public Charities: These foundations receive their funding from a variety of sources, such as individual donations, fundraising events, and government grants. 

Both types of foundations are typically governed by a board of directors. This board plays a critical role in overseeing the foundation’s activities, including grantmaking decisions and investment strategies. Their responsibility is to ensure the foundation’s funds are managed effectively and distributed strategically to maximize charitable impact while maintaining the foundation’s long-term financial health. 

Why Start a Charitable Foundation? 

Whether you’re an existing nonprofit, an individual, or a family looking to make a difference in the world, a charitable foundation can be a powerful vehicle to amplify your impact while offering you greater control over your giving strategy. Establishing a charitable foundation gives you more control over where your donations go, offers the chance to involve your entire family in your activities, and may provide significant tax advantages. 

Make a Lasting Impact 

Charitable foundations enable you to focus your giving on specific causes that deeply resonate with your organization’s or your own philanthropic values. For example, if you have an interest in supporting environmental protection, a foundation could enable you to dedicate resources to a specific area of environmental concern, such as promoting sustainable agriculture or protecting endangered species. 

A charitable foundation also enables you to create an endowment, a permanent fund serves as a cornerstone for your foundation’s long-term sustainability. Your foundation can generate ongoing grant money, ensuring a consistent stream of resources to support your chosen causes, which turns your charitable impact into a legacy that continues to give back year after year. 

Family Legacy 

Starting a foundation offers a unique opportunity to involve family members in philanthropy and instill charitable values in future generations. Family members can participate in the foundation’s activities, such as governance, grantmaking decisions, volunteering, and fundraising. Working together can strengthen family bonds and give younger family members a sense of responsibility and purpose. 

Greater Control and Flexibility 

Private foundations offer donors more control and flexibility in their charitable giving compared to making direct donations. Donors can choose specific beneficiaries, set grantmaking guidelines, and support innovative or niche causes that may not receive much or any attention from larger public charities. 

Foundations can also set their own priorities and adjust them as needed. They have the flexibility to provide funding through grants, loans, or program-related investments. Unlike direct donations, which are often one-time contributions, foundations can make multi-year funding commitments. 

Foundations are also governed by a board of directors or trustees who have control over decision-making processes. The consistent oversight provided by a board helps ensure that the foundation’s resources are used according to its mission and goals. 

Tax Advantages of Private Foundations

Charitable foundations offer multiple tax advantages: immediate income tax deductions, avoidance of capital gains tax, tax-free growth of assets, reduction or elimination of estate and gift taxes, and income tax deductions. By using a charitable foundation for your philanthropic endeavors, you will have more after-tax money you can put to work for those who will benefit from your donations. 

Income Tax Deductions 

One of the primary tax benefits of setting up a private foundation is the ability to claim income tax deductions. Donors can deduct up to 30% of their adjusted gross income (AGI) for cash donations to the foundation. 

For donations of long-term appreciated publicly traded assets, such as stocks or real estate, the deduction limit is typically 20% of AGI. If the donation exceeds these limits, the donor can carry forward unused deductions for up to five years, maximizing their tax benefits over time. 

Capital Gains Tax Savings 

Donating long-term appreciated assets to a foundation can provide donors with significant savings in capital gains taxes. When donors contribute assets that have increased in value, they may not have to pay capital gains tax on the appreciation. The full value of the asset will then be available for charitable use, enhancing the foundation’s resources and the overall impact of the donation. 

Estate Tax Benefits 

Private foundations also provide estate tax benefits by removing donated assets from the donor’s taxable estate. Donors can reduce the size of their estate by transferring assets to their private foundation, potentially lowering their estate tax liability. The result is that more of the donor’s wealth will be directed towards charitable causes rather than being diminished by estate taxes. 

Set Up Your Foundation with Chisholm Law 

At Chisholm Law, we are highly experienced in foundation formation and offer comprehensive services to guide you through the process. Our team of experienced attorneys will help you navigate the legal and regulatory requirements, ensuring your foundation is set up correctly and efficiently. 

We provide personalized advice tailored to your philanthropic goals and financial situation, helping you maximize the benefits of your charitable giving. We assist in every stage of foundation formation from drafting articles of incorporation and bylaws and obtaining a tax exemption at the outset to ongoing compliance with regulatory requirements.

Contact us today for a free consultation to learn how Chisholm Law can assist you in setting up your foundation, along with any other nonprofit legal needs you may have.

*Past results do not determine future outcomes

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