NPCF and Private Foundations: A Comparison

Communities within Virginia’s Northern Piedmont area are richly blessed with an abundance of natural, cultural and intellectual resources. Whether natives or transplants, residents may have a desire to “give something back” – to build and enhance the place where they built a business, established a career, or raised a family.

For an individual in the right circumstances, a private foundation can be an attractive way to accomplish charitable objectives.

Creating a Private Foundation: Pros and Cons

A private foundation is an independent charitable corporation or trust that is established, controlled, and maintained over time by the donor, or under the instructions of the donor. Unlike a direct gift, which usually benefits one recipient on one occasion, a private foundation perpetuates generosity over time and allows the donor to support many and varied charitable organizations. Private foundations offer substantial flexibility: they can be established for virtually any philanthropic purpose, and they can be established during a lifetime or through a will.

Predictably, however, the advantages of private foundations also carry some significant costs. Gifts to private foundations have more limited tax benefits than gifts to public charities. The foundation’s trustees must comply with stringent and cumbersome IRS regulations. Private foundations are required to pay federal excise taxes of up to 2% of net investment income, depending on the foundation’s distribution pattern. And, the foundation’s tax returns are public information, which limits the trustees’ privacy in operating the foundation.

The administrative burdens of maintaining a private foundation over time may be formidable and costly. Due to these various limitations, a private foundation often is not a practical option unless the donor is prepared to make a very substantial commitment of time and/or money. Moreover, after the donor’s death, the successor’s trustees may or may not have the time, skill, or interest to continue the donor’s charitable work.

Creating a Personal Philanthropic Fund at the Northern Piedmont Community Foundation

Is it possible to achieve the advantages of a private foundation without the difficulties? Fortunately, the answer is yes. By creating a personal philanthropic fund at the Northern Piedmont Community Foundation (NPCF), donors can enjoy the recognition, personal involvement, and flexibility of a private foundation along with the simplicity, convenience, and tax benefits of a public charity. Here’s how it works:

• Create and name a personal philanthropic fund through a simple three-page governing document (or through a will).
• Specify the purpose(s) of the fund.
• Name the fund’s advisor(s).
• Retain as much or as little involvement as desired in identifying grant recipients.
• Within specified guidelines, grants may be made from the fund to any legitimate charitable agencies. As an added safeguard, the Northern Piedmont Community Foundation ensures that all grantees are classified as charities by the IRS. If desired, NPCF can also provide a full range of grant services, including publicizing the availability of grants, identifying potential recipients, screening applicants, making grant payments, and monitoring performance. The Northern Piedmont Community Foundation staff can help sort through the many charitable organizations serving our community and identify the projects that accomplish the donor’s objectives most effectively.

By establishing a personal philanthropic fund at the Northern Piedmont Community Foundation a vehicle can be created to achieve the same philanthropic objectives as those of a private foundation. The following tax advantages are also achieved.

Tax and Regulatory Benefits

Enhancing tax benefits: Gifts to create a personal fund at the Northern Piedmont Community Foundation often offer greater tax deductions than gifts to a private foundation. For gifts of appreciated real estate or closely held securities, for example, a donation to a personal fund at NPCF can be deducted at full market value, while a gift to a private foundation is limited to your cost basis.

Eliminating excise taxes: Private foundations are required to pay federal excise taxes of up to 2% of net investment income, depending on the foundation’s distribution pattern. Personal philanthropic funds at the Northern Piedmont Community Foundation are not.

Avoiding pay out requirements: Unlike private foundations, funds at NPCF are not required by the IRS to pay out a certain amount each year, and thus have greater flexibility to hold non-income producing assets or to accumulate income by reinvesting earnings in anticipation of making larger gifts.

Eliminating red tape: Private foundations are subject to limitations on business holdings and transactions with those who manage, control or make large gifts to them. Stiff penalties can result for knowingly or unknowingly violating these restrictions. Funds at the Northern Piedmont Community Foundation are not subject to these regulations.

Avoiding start-up costs: Funds at NPCF are automatically covered by its tax-exempt status, eliminating the need to incorporate and file for exemption with the IRS.

Administrative Benefits

Eliminating administrative burdens: The Northern Piedmont Community Foundation handles all accounting, auditing, tax filing and investment, eliminating the need to conduct or contract for these services.

Ensuring recognition: All grants are made in the name of the fund unless a donor requests anonymity. Funds are publicized to the community in NPCF’s Annual Report and other publications.

Maintaining privacy: The tax returns of private foundations are public information and are entered into directories for grant seekers. Although the tax returns of NPCF are also public, the records of individual funds are not, which affords donors greater privacy in operating their funds.

Ensuring permanence and continuity: Donors can be assured that after they die, the Northern Piedmont Community Foundation is legally bound to continue operating the fund within the established guidelines. If the original purpose becomes obsolete, NPCF will maintain the fund’s basic intent by reapplying the funds to the closest similar purpose, without a costly court proceeding.

Reduced Costs

All Northern Piedmont Community Foundation services are provided at a very low cost. The administrative fee (exclusive of investment manager fees) ranges from 1.0% to .6% of the fund balance per year.

With the Northern Piedmont Community Foundation, less goes to administration and more goes to charity.

Summary

Establishing a personal philanthropic fund can be a satisfying and effective way to translate charitable interests into action. A complete chart comparing community foundations and private foundations is attached.

The Northern Piedmont Community Foundation stands ready to assist you and your advisors in sorting through the options and creating a philanthropic vehicle that is exactly tailored to a donor’s needs and interests.

For additional information, please contact the Northern Piedmont Community Foundation at 540-349-0631 or by email at NPCF@verizon.net.