Public Vs. Private

Foundation Fund or Private Foundation

Is a Private Foundation the right option for your client or is a Fund in The Community Foundation a better choice? For a quick side-by-side comparison of the two download the form below.

Foundation Fund or Private Foundation

Charitable giving offers many different donor options. Donors may make contributions using both public and private foundations. The Community Foundation of Greater Rochester was founded on the premise that contributions both large and small would have greater benefit to the community if they were joined.

Historically, charitable giving was something in which only the wealthy few could be involved and the only way to accomplish significant charitable giving was to establish a private foundation. Today, some donors may still find this their best option, but the tax benefits of gifts to a private foundation are more limited because a private foundation does not qualify as a public charity. There is also an increasing trend toward terminating them and transferring the assets to community foundations or commercial gift funds. As newer private 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.

Establishing a charitable fund within the Community Foundation of Greater Rochester provides another giving option. The Community Foundation offers the maximum tax advantages of a public charity and the opportunity for the donor to be involved and recognized. The Community Foundation can serve as your “charitable checkbook” for those who contribute to multiple organizations. The Community Foundation makes all of the distributions while you write one check or make one contribution. Giving through the Community Foundation is easy, flexible and rewarding.

Commercial gift funds such as donor-advised vehicles offered by financial firms offer online service and are a convenience for the transactional donor. 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.

The Community Foundation’s staff has experience in this area and knows the issues, trends and leaders throughout Greater Rochester area. The Community Foundation has spent years developing local relations that can assist in carrying out the donor’s purpose while meeting current needs. Donors who have advised funds – our equivalent of private foundations – can consult with the Community Foundation on their giving goals.

The Community Foundation of Greater Rochester offers your clients the following:

Permanence: The Community Foundation of Greater Rochester is a permanent endowment. The Community Foundation allows 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 the Community Foundation of Greater Rochester are typically far less costly. A fund 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, the Community Foundations is not required by the IRS to disclose the names of its donors. Donors who do not desire publicity keep their gifts anonymous. 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 using the Community Foundation of Greater Rochester which is designed to meet a broad range of charitable needs in the Greater Rochester area and allow donors who choose to create donor advised funds to suggest grants to qualified nonprofit organizations throughout the country.

Donors to the Community Foundation of Greater Rochester have a variety of funds from which to choose:

  • UNRESTRICTED FUND is the most flexible and is used by the Community Foundation to address the most pressing needs of the community.
  • FIELD-OF-INTEREST FUND names a broad or narrow area or areas of interest, such as culture, community development, education, the environment, human concern, and youth. The Community Foundation identifies the nonprofit organizations best suited to carry out the purpose.
  • DESIGNATED FUND provides support to organizations named by the donor as long as those organizations exist and are working effectively to accomplish the goals consistent with the donor’s goals.
  • SCHOLARSHIP FUND helps further the education of students who fit criteria selected by the donor.
  • DONOR-ADVISED FUND allows donors to suggest the organizations they wish to support. The Community Foundation staff reviews these suggestions to ensure that the recommended organizations are consistent with IRS guidelines and that the organizations fiscal affairs are in order.

Tax and Regulatory Issues

Funds in the Community Foundation of Greater Rochester enjoy preferential tax treatment in a number of ways:

Deductibility of Charitable Gifts: The Community Foundation of Greater Rochester qualifies as publicly supported charity under Internal Revenue Code sections 501(c)(3) and 170(b)(1)(A)(vi). That status entitles the Community Foundation’s donors to tax deductions that often exceed those of a private foundation. This may affect clients who make large lifetime gifts relative to income or who contribute appreciated property other than publicly traded stock.

For gifts of cash to the Community Foundation, donors 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.

The Community Foundation’s 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 while 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

Private Foundations are constrained by a number of restrictions that 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 are subject to excise tax on net investment income which reduces funds available for grantmaking.

Minimum Payout: Private foundations are required to distribute 5 percent of assets for grants and charitable expenses annually regardless of whether that much is earned. This may lead to erosion of the fund, limit holding certain assets, or accrue income for a major project.

Excess business holdings: Private foundations 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 private 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 it does 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.

© 2018 Community Foundation of Greater Rochester, a 501(c)3 nonprofit organization.
303 East Street | P.O. Box 80431 | Rochester, MI 48308-0431

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