Foundations: They're Not Just For RockefellersJoan Warner
One way to maximize control over your charitable donations is to set up your own foundation. Far from being an option exclusive to Rockefellers or Carnegies, most of the 30,000 private foundations in the U.S. were started by people with a net worth of less than $1 million. The tax and legal rules governing private charities are complex but not onerous. And designing your own program can be more rewarding than just writing checks to bigger institutions.
The main difference between public and private foundations is that private charities are normally funded by one individual or family. When you apply to set up a tax-exempt charitable organization, the Internal Revenue Service conducts various tests to make sure it doesn't qualify as a public charity. Hospitals, schools, libraries, churches, and museums, for example, aren't treated as private foundations.
Most private foundations are nonoperating: Rather than doing their own research or providing direct services, they disburse money to other charities of the founder's choice. Thus, you might make regular grants to a favorite cancer center or animal shelter, or award scholarships or research money directly to individuals.
For many founders, philanthropy dovetails with estate planning. When you endow a private foundation, your taxable estate is cut by the endowment amount. You also get a current income-tax deduction of up to 30% of adjusted gross income. Then, you must disburse at least 5% of the foundation's total assets every year. The foundation's income is subject only to a 1%-to-2% excise tax.
COMMON CAUSE. "But it's more than just tax economics," says Steven Thorne, a regional director of Arthur Andersen's Family Wealth Planning Group in Chicago. For entrepreneurs, establishing a charity can be a rewarding second career. Leon Danco, president of the Family Business Center in Cleveland, believes that running a private foundation is the best way for business owners to ease the trauma of succession once they retire. In wealthy families, private foundations let several generations pursue a common cause while shielding an estate that would otherwise go largely to Uncle Sam.
In drafting the articles for your foundation, filing with the IRS, and drawing up any trust agreements, you'll need a lawyer and an accountant with experience in charitable giving. Up-front costs can be as low as $1,000 and as high as $25,000, depending on the size of your assets and the activities you wish to pursue. Before you start, call the Council on Foundations in Washington (202 466-6512) and get First Steps in Starting a Foundation. This clear guidebook shows how you can feel like the Rockefellers with just a fraction of their fortune.