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Weighing the Options: A Private Foundation or a Fund in The Community Foundation

Here we explore some of the costs and benefits of a fund in a community foundation compared to a private foundation. For a quick side-by-side comparison of the two, check out the Advisor Toolkit.

Donors today have a number of options for their philanthropy. Community Foundations are public charities that are geographically based; they know about local needs and the organizations that can best fill them. They offer tailor-made charitable services, quickly and at little or no cost. They are also connected to grantmakers all over the country and can help donors target support even when the best nonprofits may be located outside their area. Donors establish a fund in The Community Foundation to accomplish their charitable goals.

Commercial gift funds – donor-advised vehicles offered by financial firms – offer online service and are a convenience for the transactional donor. But because they are national and don’t have staff who live in the donor’s community, they can’t offer donors personal service and/or information about local charities.

Private foundations are another popular option for today’s donor, and for some donors they are the right option. But as the Wall Street Journal reported on April 22, 2009, there is an increasing trend toward terminating them and transferring the assets to community foundations or commercial gift funds, suggesting that they weren’t the correct vehicle in the first place. And the president of the Foundation Center, which recently surveyed family foundations, said: “As these young foundations face transition in leadership from the first to the second generations, questions about sustainability, family capacity or commitment, donor intent, and foundation impact may lead them to consider their options.”

Administrative Considerations

Expertise & Support: The Community Foundation of Middle Tennessee, with assets of over $400 million, is staffed by a group of seasoned professionals, all experts in the field of connecting generosity with need.

Our grantmaking staff has experience in this area for up to 20 years and knows the issues, trends and effective players throughout Middle Tennessee; they have colleagues working in communities throughout the country on whom they can call. They are charged with ensuring that grants from our funds carry out the donor’s purpose effectively while meeting contemporary needs. Donors who have advised funds – our equivalent of private foundations – can consult with them on their giving goals. We offer excellent donor service, sophisticated investment management and sound advice on tax and estate planning.

Permanence: Community foundations like The Community Foundation of Middle Tennessee are permanent endowments. Community foundations allow family involvement following a donor’s death, but can also carry on in his or her absence. The Community Foundation’s variance power ensures that grants from our funds will always have meaning and impact consistent with what the donor intended.

Cost Effectiveness: Private foundations can be costly to establish and maintain, reducing the amount available to charity. Even for the simplest private foundation, initial filing and approval can take months and cost thousands of dollars. Routine operating items such as auditing, bookkeeping, and government reporting can add significantly to the annual cost.

Funds in community foundations are typically far less costly to operate. A fund at The Community Foundation of Middle Tennessee can be established quickly. The quarterly service fee and investment fees are modest. As a result, more money is available for grantmaking.

Choice of Anonymity: As a public charity, community foundations are generally not required by the IRS to disclose the names of their donors. Donors who do not desire publicity and wish to keep their gifts anonymous can accomplish this through a community foundation. Donors willing to share their name and their support for a cause or organization will find The Community Foundation can do that in a way that suits them best. Private foundations, on the other hand, are required to make public the names of their donors and information about their grants.

Flexibility: Almost any philanthropic purpose can be accomplished through a community foundation, which is structured to meet a broad and evolving set of charitable needs in a geographic region, while allowing donors who choose to create donor advised funds to suggest grants to qualified nonprofit organizations throughout the country.

Donors have a variety of funds from which to choose:

  • An UNRESTRICTED IMPACT FUND is the most flexible and is used by The Foundation to address the most pressing needs of the community.

  • A FIELD-OF-INTEREST FUND names a broad or narrow area or areas of interest, such as public education, the environment, homelessness, animal welfare or a particular town/county, and The Community Foundation identifies the nonprofit organizations best suited to carry out the purpose.

  • A DESIGNATED FUND provides regular annual support to organizations named by the donor as long as those organizations exist and are working effectively to accomplish the goals the donor believed in.

  • A SCHOLARSHIP FUND helps further the education of deserving students who fit criteria defined by the donor.

  • A DONOR-ADVISED FUND allows donors to suggest the organizations to which they wish grants to be made. The Community Foundation staff review donor suggestions to ensure that the recommended organizations meet IRS guidelines and that its fiscal affairs are in order.

The Community Foundation staff review donor suggestions to ensure that the recommended organizations meet IRS guidelines and that its fiscal affairs are in order.

Tax and Regulatory Issues

Funds in community foundations enjoy preferential tax treatment in a number of ways:

Deductibility of Charitable Gifts: Even though community foundations are aggregations of separate funds, they qualify as publicly supported charities under Internal Revenue Code sections 501c3 and 170(b)(1)(A)(vi). That status entitles community foundation donors to tax deductions that are often superior to those accorded private foundation donors. These differences particularly affect clients who make large inter vivos (lifetime) gifts relative to income or who contribute appreciated property other than publicly traded stock.

For example, for gifts of cash, donors to community foundations may deduct up to 50 percent of adjusted gross income (AGI) in the year of the gift, with a five-year carryover for excess contributions. Private foundation donors may deduct only up to 30 percent of AGI with the same carryover.

Community foundation donors who contribute gifts of appreciated property (other than tangible personal property) can deduct them at full fair market value up to 30 percent of AGI. Private foundation donors may deduct only gifts of publicly traded stock at fair market value up to 20 percent of AGI; all other forms of appreciated property, including closely held stock and real estate, are deductible at cost only.

Other Rules Governing Private Foundation Activities

The Internal Revenue Code and regulations embody numerous provisions that constrain private foundations. Generally, these restrictions do not apply to public charities, including community foundations. Private foundations that fail to properly abide by these requirements may be subject to penalty taxes.

Excise Tax: Private Foundations pay a 2 percent excise tax on net investment income, effectively reducing funds available for grants. The tax may be reduced to 1 percent if certain payout conditions are met. (NB: S.676 was introduced in the US Senate in March 2009 and may amend this structure.)

Minimum Payout: A private foundation must spend on grants and charitable expenses an annual amount equal to approximately 5 percent of assets, whether or not that much is earned. This can limit the private foundation’s ability in some circumstances to hold low-yielding assets for later gain, or to accrue income for a major project.

Excess business holdings: In general, the private foundation and those who manage, control, or make large gifts to it (and other related entities) may not together own more than 20 percent of the equity interest in a business. The foundation’s “excess business holdings” generally must be disposed of within five years of receipt. This rule generally does not apply to public charities, including community foundations, although its scope has been expanded to apply to assets held in donor-advised funds.

Awards to individuals: In order to award scholarships, fellowships or other grants to individuals, a private foundation must first apply to the Commissioner of Internal Revenue for approval of its grantmaking procedures. Then it must obtain pre-grant and post-grant reports from each recipient and report the results to the IRS.


Before recommending a private foundation to clients, professional advisors should weigh both their immediate costs and long-term viability. The continuing turmoil in the financial markets has taken a huge toll on private foundations. It has also reduced the assets of community foundations. But, by pooling the support of many, The Community Foundation can weather downturns and continue to make grants that have impact and make a difference.

For further reference:
IRC Section 170: Income tax deductions for charitable contributions and the limits on such deductions.
IRS Section 501(c)(3): Charitable organizations defined.
IRS Section 509: Private foundations defined.
IRS Sections 4940-4946: Rules governing private foundations.
Treas. Reg. Section 1.507-2(a)(8): Material restrictions on assets.
Treas. Reg. Section 1.170A-9(e)(10)-(11): Community trusts defined.

*Excerpts of this information are from The New York Community Trust’s Tax and Estate Planning Notes, written by Jane L. Wilton, general counsel, and Amarah Sedreddine, associate general counsel.