Setting up and Managing a Private Foundation

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

My wife and I have tentatively decided to create a non-profit corporation and run it as a private foundation.

We expect to receive a deduction in whole for the value of highly appreciate stock as the donation is less than 20% of our AGI for 2020.

As I research how to go about doing this, I'm not sure how to do it. As I review the docs it looks like I could educate myself and follow the requirements.

At first glance, it looks like something I could do myself. Not more complicated than managing my investments and filing my own taxes.

However, I'm thinking it might be worth it to hire an attorney who is wise in the ways of non-profit formation and tax filings and requirements.

What do you all think? Go it alone, or use an attorney?
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Carefreeap
Posts: 2860
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Setting up and Managing a Private Foundation

Post by Carefreeap »

Use an attorney who specializes in this kind of thing.

There are a number of rules and regulations including tax reporting required to keep the tax exempt status.

What's the order of magnitude of the donation? In many cases you may be far better off doing direct donation than dealing with the paperwork required to keep the foundation going. MIL wants a foundation set up on her demise but the funding will be something like $150k. Makes no sense.
Every day I can hike is a good day.
Gill
Posts: 6681
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Setting up and Managing a Private Foundation

Post by Gill »

You should consult with an attorney specializing in charitable entities, if for no other reason than to assure a private foundation and your intended funding make sense. There are other ways that be more efficient and easier to manage. Private foundations often don’t make sense unless the amounts involved are very substantial. Trusts or donor advised funds are often more appropriate.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
inbox788
Posts: 7582
Joined: Thu Mar 15, 2012 5:24 pm

Re: Setting up and Managing a Private Foundation

Post by inbox788 »

How old are you? How long is the foundation expected to last? What is the succession plan?
sailaway
Posts: 2223
Joined: Fri May 12, 2017 1:11 pm

Re: Setting up and Managing a Private Foundation

Post by sailaway »

Is your idea actually filling a void/ doing something better than anyone is currently doing it?

You say "this shouldn't be any more challenging than managing my investments and filing my taxes." That sounds more like a DAF than a non -profit corporation, which will actually need to be run.
Ragnoth
Posts: 265
Joined: Sat Sep 17, 2016 8:10 am
Location: New York

Re: Setting up and Managing a Private Foundation

Post by Ragnoth »

Private foundations have some pretty strict filing and reporting requirements, along with obligations to distribute a fixed portion of the endowment each year (my vague recollection is that it is 5%). It’s not the kind of thing anybody should be trying to do on their own.

Depending on why you want the foundation, you may get similar bang-for-your-buck out of a donor advised fund. Notably, you can still control how the money is invested, you can direct how the money is disbursed to charity, and you can get your deduction up front.

There is minimal reason to mess with a private foundation unless you are planning to give out grants to individuals, hire your buddies onto the board, and/or invest in individual stocks and esoterica.
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

inbox788 wrote: Thu Jun 18, 2020 6:52 pm How old are you? How long is the foundation expected to last? What is the succession plan?
40s, centuries, heirs run it and on terminal bloodline assets go to predesignated charities.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

Gill wrote: Thu Jun 18, 2020 6:49 pm You should consult with an attorney specializing in charitable entities, if for no other reason than to assure a private foundation and your intended funding make sense. There are other ways that be more efficient and easier to manage. Private foundations often don’t make sense unless the amounts involved are very substantial. Trusts or donor advised funds are often more appropriate.
Gill
Generally agreed, have appts with 4 attorneys that purport to do work in this area.

I am also consulting with a friend of a friend who works for known-family-name private foundations.

The amounts are very low 7 digits.

DAF won't allow us to do the specialized scholarship we won't.

Trust won't give us the tax benefit.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Gill
Posts: 6681
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Setting up and Managing a Private Foundation

Post by Gill »

NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:57 pm
inbox788 wrote: Thu Jun 18, 2020 6:52 pm How old are you? How long is the foundation expected to last? What is the succession plan?
40s, centuries, heirs run it and on terminal bloodline assets go to predesignated charities.
You’re getting younger. A year ago you said early 50’s.😀
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

Gill wrote: Thu Jun 18, 2020 7:01 pm
NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:57 pm
inbox788 wrote: Thu Jun 18, 2020 6:52 pm How old are you? How long is the foundation expected to last? What is the succession plan?
40s, centuries, heirs run it and on terminal bloodline assets go to predesignated charities.
You’re getting younger. A year ago you said early 50’s.😀
Gill
I started exercising.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Katietsu
Posts: 3977
Joined: Sun Sep 22, 2013 1:48 am

Re: Setting up and Managing a Private Foundation

Post by Katietsu »

NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:58 pm
Gill wrote: Thu Jun 18, 2020 6:49 pm You should consult with an attorney specializing in charitable entities, if for no other reason than to assure a private foundation and your intended funding make sense. There are other ways that be more efficient and easier to manage. Private foundations often don’t make sense unless the amounts involved are very substantial. Trusts or donor advised funds are often more appropriate.
Gill
DAF won't allow us to do the specialized scholarship we won't.
Are you sure there is not an organization that you could work with on the scholarship? I have actually been involved or had a front row seat to three different people who set up very specific scholarships with very specific criteria. One person remained very involved in selecting the recipients and was the deciding vote. The amounts involved were close to or higher than yours. None set up their own non profit to do it. All worked with a pre existing non profit and worked within it. In only one case was the organization an obvious pairing.
inbox788
Posts: 7582
Joined: Thu Mar 15, 2012 5:24 pm

Re: Setting up and Managing a Private Foundation

Post by inbox788 »

NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:57 pm
inbox788 wrote: Thu Jun 18, 2020 6:52 pm How old are you? How long is the foundation expected to last? What is the succession plan?
40s, centuries, heirs run it and on terminal bloodline assets go to predesignated charities.
The easy and fun part is when you're around to set it up, but when it's no longer fun, finding the right continuity plan is essential. I've thought about doing a small scholarship, say $1000 in perpetuity. The idea sounds good right now and I'd like to administer and distribute myself, but might get tired of it in a decade; then what? I figured I could fund it along the way and include a lump sum endowment in my will, but haven't found a low cost simple solution. Figure 4% SWR would be a start, so $25k would be minimum, with some chance of failure; then what? A $50k endowment solves that problem for a lot longer, but creates future management questions.

https://www.fidelitycharitable.org/cont ... cation.pdf
http://leafferlaw.com/wp-content/upload ... xC1F27.pdf

Anyway, the more I thought about it, the more I realized I wanted to have more direct impact while I'm around, and using established programs was much simpler (like using a Collage Development Office) and any surviving funds for me were could be entrusted to the heirs with broad intention instructions instead of restrictive trust documents. At least, that's the plan for now.
NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:58 pm I am also consulting with a friend of a friend who works for known-family-name private foundations.

The amounts are very low 7 digits.

DAF won't allow us to do the specialized scholarship we won't.

Trust won't give us the tax benefit.
The amounts you're talking about are quite substantial, but I've wondered if the 5% distribution requirement would be manageable in perpetuity. How is it invested? I haven't found anything disallowing using a DAF to fund a proper private charitable foundation as a way to reduce the distribution loss, but you do have to be careful to avoid any semblance of self-dealing.

https://nonprofitlawblog.com/donor-advised-funds/

It's tricky when you try to set something up to last 100 years or more, but essential parts may not be around that long. If you setup a college scholarship, will the college be around in the future? What if free college tuition is achieved? There were already questions as to the need for traditional physical college experience, and those trends have been accelerated. So much can and will probably change, so I've given up and resigned to make a finite limited contribution.
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

Katietsu wrote: Thu Jun 18, 2020 8:00 pm
Are you sure there is not an organization that you could work with on the scholarship? I have actually been involved or had a front row seat to three different people who set up very specific scholarships with very specific criteria. One person remained very involved in selecting the recipients and was the deciding vote. The amounts involved were close to or higher than yours. None set up their own non profit to do it. All worked with a pre existing non profit and worked within it. In only one case was the organization an obvious pairing.
I'm not at all sure.

Part of the more complex issue that I didn't put in the original email (beyond my birthday and blood type (O+ for the record)) is that we are not sure we want the foundation to fund a scholarship in perpetuity.

We intend to fund a scholarship for a person whose family makes 50-150% of average income for the county, whose GPA at the end of first semester senior year is between 3.2 and 3.7, who did not participate in any varsity sports.

I have some weird theories that college may not be around in the future, or may be unimportant. The difference in inflation, total stock market return, and college cost increases is daunting. I could imagine a world where more people don't go to college, in which case we might fund a trade school or just give the money to a charity of our choice.

I don't have it all figured out, and my understanding is that the DAF gives me optionality to give to a 501(c)(3); while the PF can give me optionality to donate to a 501(c)(3) or do scholarships (with additional registration and paperwork).

In my conversation with a particular college's foundation representative, I was left disappointed and wanting, without the confidence that they would find a way to do what I want (which could possibly fund a particular scholarship with a restricted donation). Part of this is Munger's law of self-interest, the person I spoke with is probably compensated on proper donations or endowments.

So it just seems to me that the PF gives me the most control and optionality, notwithstanding I would only have the PF donate to proper charities or scholarships to non-family non-beneficial ends.

I appreciate your thoughts, perhaps you could send me the contact info for the folks at the University with whom you worked?
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Gill
Posts: 6681
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Setting up and Managing a Private Foundation

Post by Gill »

I think you will find that a seven figures is really too low for a private foundation because of the expense of establishing and operating such an entity. I urge you to consult with a community foundation which would most likely be happy to work with you on your charitable intentions.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

inbox788 wrote: Thu Jun 18, 2020 8:21 pm
NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:57 pm
inbox788 wrote: Thu Jun 18, 2020 6:52 pm How old are you? How long is the foundation expected to last? What is the succession plan?
40s, centuries, heirs run it and on terminal bloodline assets go to predesignated charities.

The easy and fun part is when you're around to set it up, but when it's no longer fun, finding the right continuity plan is essential.
First of all, thank you for your very thoughtful response.

I don't think I have it all figured out. I do expect that this is something my wife and I would run, and as our kids get older they'd be involved. I believe helping the kids to learn that having money is a stewardship responsibility, and that giving to charity should be a deliberate reasoned thought process is important.

I'd like to see the kids take it over when we're older.

I don't expect that doing the paperwork or making the decision, board meetings, or filing the taxes (or outsourcing all of that) would be extraneous to my abilities or interest for some time.

As an escape clause, we'd write in (as the IRS requires) where the terminal donation goes on dissolution.
inbox788 wrote: Thu Jun 18, 2020 8:21 pm I've thought about doing a small scholarship, say $1000 in perpetuity. The idea sounds good right now and I'd like to administer and distribute myself, but might get tired of it in a decade; then what? I figured I could fund it along the way and include a lump sum endowment in my will, but haven't found a low cost simple solution. Figure 4% SWR would be a start, so $25k would be minimum, with some chance of failure; then what? A $50k endowment solves that problem for a lot longer, but creates future management questions.
That's similar to my thoughts. We put $1M into the foundation, each year it might generate $40k on which we pay 1.39% excise tax leaving $39,444 of gain, and we fund one 4-year scholarship at $10k/year with it. So there'd be 4 concurrent at a drain of $40k/year with hopefully the same growth in the porfolio; if not we can top if off or do a bake sale.

Thanks for posting these. I've read the fidelity one, and the lefferlaw is pretty good.

The DAF removes my control over the scholarship award. So that is suboptimal.

The PF comes with certain requirements for the scholarship but allows the PF to control decision. And we can opt out of the scholarship decision.
inbox788 wrote: Thu Jun 18, 2020 8:21 pm Anyway, the more I thought about it, the more I realized I wanted to have more direct impact while I'm around, and using established programs was much simpler (like using a Collage Development Office) and any surviving funds for me were could be entrusted to the heirs with broad intention instructions instead of restrictive trust documents. At least, that's the plan for now.
Makes sense and seems reasonable. Simplicity is important.
NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:58 pm I am also consulting with a friend of a friend who works for known-family-name private foundations.

The amounts are very low 7 digits.

DAF won't allow us to do the specialized scholarship we won't.

Trust won't give us the tax benefit.
inbox788 wrote: Thu Jun 18, 2020 8:21 pm The amounts you're talking about are quite substantial, but I've wondered if the 5% distribution requirement would be manageable in perpetuity. How is it invested? I haven't found anything disallowing using a DAF to fund a proper private charitable foundation as a way to reduce the distribution loss, but you do have to be careful to avoid any semblance of self-dealing.
Right. If I'm following you, we could put the money in a DAF, and then form a proper 501(c)(3) that is not a PF - but to do that we have >30% of the donations/money from someone other than our family.

So we could pick and choose or do restrictive donations to non-controlled 501(c)(3) but that seems like more work than just doing a PF as myself.

The goal here isn't to create an everlasting PF. If it lasts for hundreds of years, great, it can do good after we're gone with our heirs input. If it peters out in 10 years we did some good until then.

inbox788 wrote: Thu Jun 18, 2020 8:21 pm
https://nonprofitlawblog.com/donor-advised-funds/

It's tricky when you try to set something up to last 100 years or more, but essential parts may not be around that long. If you setup a college scholarship, will the college be around in the future? What if free college tuition is achieved? There were already questions as to the need for traditional physical college experience, and those trends have been accelerated. So much can and will probably change, so I've given up and resigned to make a finite limited contribution.
Agreed, this is part of the reason why I don't want to make a college-locked donation.

Part of the reason we want to put the donation in this year is our AGI is somewhat large this year which allows us to deduct a sizable charitable donation; so the trio of timing, control, and tax-write off points me to the PF.
Last edited by NewMoneyMustBeSmart on Thu Jun 18, 2020 8:49 pm, edited 1 time in total.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

Gill wrote: Thu Jun 18, 2020 8:40 pm I think you will find that a seven figures is really too low for a private foundation because of the expense of establishing and operating such an entity. I urge you to consult with a community foundation which would most likely be happy to work with you on your charitable intentions.
Gill
Thank you for your thoughts. I will consider it.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
bsteiner
Posts: 5117
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Setting up and Managing a Private Foundation

Post by bsteiner »

NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:58 pm ... have appts with 4 attorneys that purport to do work in this area.
..
The amounts are very low 7 digits.
...
We've set up at least a few dozen foundations, and I'm on the board of one, so I'll comment on this.

It isn't worth consulting 4 lawyers, and it isn't fair to them to shop it around unless you pay them for their time. Setting up a foundation should be a routine matter for any firm with a good trusts and estates practice.

$1 million is at the smaller end of the range for a foundation, but the costs of the foundation will probably be less than the cost of a donor advised fund. But for the scholarships, it would cost in the mid to high 4 figures to form a not-for-profit corporation and do by-laws and minutes or to form a charitable trust, and then to obtain a tax exemption from the IRS. It will then cost a couple of thousand dollars a year for the annual tax return (Form 990-PF), and on your numbers about $500 to $600 a year for the excise tax.

You'll probably want either one of the medium size accounting firms or one of the smaller firms that focus on non-for-profit entities to do the annual tax returns.

By way of comparison, either Fidelity or Vanguard would charge $4,500 a year for a $1 million DAF.

While community foundations are sometimes appropriate, they generally cost about 1% a year, and you give up some control.

There will be some additional work if you want to give scholarships. The IRS wants to be sure that you aren't trying to give the scholarships to your friends and family. You'll have to answer the questions on Schedule H of Form 1023 (the form to apply for a tax exemption): https://www.irs.gov/pub/irs-pdf/f1023.pdf. See page 25 of the form, which is the 27th sheet of the pdf document. Also see pages 22-23 of the instructions to Form 1023: https://www.irs.gov/pub/irs-pdf/i1023.pdf.

The 5% payout requirement was enacted as part of the Tax Reform Act of 1969. Congress was concerned that there were some foundations that were spending very little on charitable purposes, and didn't think that they should enjoy tax-exempt status unless they were spending at least that amount on charitable purposes. With a 5% payout requirement, unless a foundation receives additional contributions, it will likely grow slowly in nominal dollars and it will probably not grow very much if at all in real terms. However, since there will be new foundations and additional contributions to new or existing foundations, foundations collectively will grow in value.

In any event, if for whatever reason you or your successors ever decide it no longer makes sense to administer the foundation, or if there's no one who wants to administer it, you or your successors can always wind it up and give the money to one or more charitable organizations.
Last edited by bsteiner on Fri Jun 19, 2020 6:17 am, edited 1 time in total.
Flora
Posts: 112
Joined: Sat Mar 26, 2016 6:19 am

Re: Setting up and Managing a Private Foundation

Post by Flora »

Keep in mind that if the PF sells the stock you donated to it, the PF pays the 1.39% excise tax on the gain calculated as the excess of the proceeds over your own original cost basis.
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

bsteiner wrote: Thu Jun 18, 2020 10:13 pm
NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:58 pm ... have appts with 4 attorneys that purport to do work in this area.
..
The amounts are very low 7 digits.
...
We've set up at least a few dozen foundations, and I'm on the board of one, so I'll comment on this.

It isn't worth consulting 4 lawyers, and it isn't fair to them to shop it around unless you pay them for their time. Setting up a foundation should be a routine matter for any firm with a good trusts and estates practice.

$1 million is at the smaller end of the range for a foundation, but the costs of the foundation will probably be less than the cost of a donor advised fund. But for the scholarships, it would cost in the mid to high 4 figures to form a not-for-profit corporation and do by-laws and minutes or to form a charitable trust, and then to obtain a tax exemption from the IRS. It will then cost a couple of thousand dollars a year for the annual tax return (Form 990-PF), and on your numbers about $500 to $600 a year for the excise tax.
Thank you for the thoughtful response.

For context, the purpose in shopping it around is to see who we want to work with.

I infer but am not certain from your context that the relationship with the attorney will likely end after formation; and then all work will be with the accounting firm? That the accounting firm will likely be our copilot for regulation compliance, not the attorney's firm?
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
jebmke
Posts: 11387
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Setting up and Managing a Private Foundation

Post by jebmke »

Gill wrote: Thu Jun 18, 2020 8:40 pm I think you will find that a seven figures is really too low for a private foundation because of the expense of establishing and operating such an entity. I urge you to consult with a community foundation which would most likely be happy to work with you on your charitable intentions.
Gill
I work with a couple of local charities in my area. They will not deal with some of the small, private foundations because in some cases there have been noted "abuses" -- self-dealing, holding foundation board meetings in Florida to expense travel etc. Because of the risk of association, we often find it better to work with the local community foundation which is quite good in my area.
When you discover that you are riding a dead horse, the best strategy is to dismount.
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

Flora wrote: Thu Jun 18, 2020 11:04 pm Keep in mind that if the PF sells the stock you donated to it, the PF pays the 1.39% excise tax on the gain calculated as the excess of the proceeds over your own original cost basis.
While I think I knew this in the back of my head, I didn't fully realize it - thanks for pointing it out.

My back-of-the-envelope #s suggest that in totality, the cost of a PF v. DAF (and contributing to a Charitable Foundation) are not significantly different:

Image

Thanks much for the thoughtful input!
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

jebmke wrote: Fri Jun 19, 2020 7:09 am
Gill wrote: Thu Jun 18, 2020 8:40 pm I think you will find that a seven figures is really too low for a private foundation because of the expense of establishing and operating such an entity. I urge you to consult with a community foundation which would most likely be happy to work with you on your charitable intentions.
Gill
I work with a couple of local charities in my area. They will not deal with some of the small, private foundations because in some cases there have been noted "abuses" -- self-dealing, holding foundation board meetings in Florida to expense travel etc. Because of the risk of association, we often find it better to work with the local community foundation which is quite good in my area.
That's an interesting data point, and I accept it and am not arguing or refuting it.

The "self-dealing" as I understand it is properly illegal, so that's certainly bad.

The board meetings in FL seems inefficient but within their rights, maybe, maybe not.

My experience is that charities are happy to accept money from most any source, as long as it's not Epstein-esque. In other words, the money is mostly fungible to the charities, unless it risks damaging their reputation.

I'd be surprised if a charity rejected a donation because they learned we flew the board members from WA, CA, NJ, MO, and TX to Denver for a board meeting, but I wouldn't be shocked!
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
mgensler
Posts: 158
Joined: Sun Aug 20, 2017 9:17 pm

Re: Setting up and Managing a Private Foundation

Post by mgensler »

We have both a DAF and a Private Operating Foundation. We donate appreciated stock to the DAF and invest it there according to our IPS. We make donations from the DAF including to our Private Operating Foundation. The foundation only has a checking account. The foundation can then run it's own programs according to IRS rules.

Benefits: flexibility - we can make grants/run programs however we want under the terms of the IRS.

Privacy - once you put money in a foundation, the whole world knows about it. We keep the bulk in our DAF and transfer cash as needed.

Taxes- avoid the investment taxes by keeping the money invested in the DAF, also lower cost to do the 990 return.

Cost to setup foundation $5k - $10k
Annual foundation costs $10k (can be less, we just recently upped our liability insurance as we contracted with our city to install equipment in the public domain)

Make sure you research Private Operating Foundation and not Private Foundation.
bsteiner
Posts: 5117
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Setting up and Managing a Private Foundation

Post by bsteiner »

NewMoneyMustBeSmart wrote: Fri Jun 19, 2020 6:54 am
bsteiner wrote: Thu Jun 18, 2020 10:13 pm
NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 6:58 pm ... have appts with 4 attorneys that purport to do work in this area.
..
The amounts are very low 7 digits.
...
We've set up at least a few dozen foundations, and I'm on the board of one, so I'll comment on this.

It isn't worth consulting 4 lawyers, and it isn't fair to them to shop it around unless you pay them for their time. Setting up a foundation should be a routine matter for any firm with a good trusts and estates practice.

$1 million is at the smaller end of the range for a foundation, but the costs of the foundation will probably be less than the cost of a donor advised fund. But for the scholarships, it would cost in the mid to high 4 figures to form a not-for-profit corporation and do by-laws and minutes or to form a charitable trust, and then to obtain a tax exemption from the IRS. It will then cost a couple of thousand dollars a year for the annual tax return (Form 990-PF), and on your numbers about $500 to $600 a year for the excise tax.
Thank you for the thoughtful response.

For context, the purpose in shopping it around is to see who we want to work with.

I infer but am not certain from your context that the relationship with the attorney will likely end after formation; and then all work will be with the accounting firm? That the accounting firm will likely be our copilot for regulation compliance, not the attorney's firm?
Since this isn't that large a project, and the time involved for 4 lawyers to meet with you will probably be more than 50% of the cost of the project, please pay each of the 4 lawyers for his/her time in meeting with you, or give them the courtesy of telling them on the initial phone call or e-mail that you're shopping it around to at least 3 others since that might affect their decision whether to meet with you.

Along those lines, why aren't you having the law firm that handles your estate planning do this? They already know you, and understand your objectives, and can coordinate this with your estate planning.

You are correct that once the lawyer sets up the foundation and obtains a tax exemption from the IRS, the accountants will do the annual filings.
oldfort
Posts: 1731
Joined: Mon Mar 02, 2020 8:45 pm

Re: Setting up and Managing a Private Foundation

Post by oldfort »

NewMoneyMustBeSmart wrote: Thu Jun 18, 2020 8:32 pm
Katietsu wrote: Thu Jun 18, 2020 8:00 pm
Are you sure there is not an organization that you could work with on the scholarship? I have actually been involved or had a front row seat to three different people who set up very specific scholarships with very specific criteria. One person remained very involved in selecting the recipients and was the deciding vote. The amounts involved were close to or higher than yours. None set up their own non profit to do it. All worked with a pre existing non profit and worked within it. In only one case was the organization an obvious pairing.
I'm not at all sure.

Part of the more complex issue that I didn't put in the original email (beyond my birthday and blood type (O+ for the record)) is that we are not sure we want the foundation to fund a scholarship in perpetuity.

We intend to fund a scholarship for a person whose family makes 50-150% of average income for the county, whose GPA at the end of first semester senior year is between 3.2 and 3.7, who did not participate in any varsity sports.
This is a unique scholarship criteria. How did you come up with these rules?
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

bsteiner wrote: Fri Jun 19, 2020 10:46 am
Since this isn't that large a project, and the time involved for 4 lawyers to meet with you will probably be more than 50% of the cost of the project, please pay each of the 4 lawyers for his/her time in meeting with you, or give them the courtesy of telling them on the initial phone call or e-mail that you're shopping it around to at least 3 others since that might affect their decision whether to meet with you.

Along those lines, why aren't you having the law firm that handles your estate planning do this? They already know you, and understand your objectives, and can coordinate this with your estate planning.

You are correct that once the lawyer sets up the foundation and obtains a tax exemption from the IRS, the accountants will do the annual filings.
Reasonable suggestions. The first attorney seems highly competent and works w/ some known organizations I respect, so I'm not meeting with the latter 3 and the issue is moot. FWIW this was a 30 min zoom meeting preceded by an email from me outlining goals and objectives.

WRT why not using the T&E firm, maybe I should. The firm I used is a national firm and the attorney I worked with is in another state. I am trying to do more things local as I had some interesting surprises about state tax opportunities that the national firm I was working with didn't know about.

I'm planning to bring my accounting and legal advice into local folks, so I guess that's my post-facto reasoning :)
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

oldfort wrote: Fri Jun 19, 2020 11:40 am This is a unique scholarship criteria. How did you come up with these rules?
That's my background.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
afan
Posts: 5203
Joined: Sun Jul 25, 2010 4:01 pm

Re: Setting up and Managing a Private Foundation

Post by afan »

Reproducing your background must be really important to you.

It would be vastly simpler and more of the money would go to a charitable purpose if you gave the money to the college. The development office would be happy to speak with you about what requirements it would be able and willing to apply.
If you just donated to the college's endowment specifying that the money must be used to pay for financial aid, you would avoid all the other expenses that do not help anyone through college. No tax returns for your foundation. No fees to a DAF. No attorney fees to set it up. No excise taxes. Just cash from you to the college with the college using it for financial aid.

Colleges do this all the time and at least the larger ones are highly efficient, since extra costs come out of their pockets.

Lasting for hundreds of years:
Low single digit millions make that unrealistic.
We don't know whether the Ford, Rockefeller or Gates foundations will last that long.
You don't know whether your next generation will want to deal with it, let alone what will happen long after you are gone.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
oldfort
Posts: 1731
Joined: Mon Mar 02, 2020 8:45 pm

Re: Setting up and Managing a Private Foundation

Post by oldfort »

afan wrote: Fri Jun 19, 2020 1:25 pm Reproducing your background must be really important to you.

It would be vastly simpler and more of the money would go to a charitable purpose if you gave the money to the college. The development office would be happy to speak with you about what requirements it would be able and willing to apply.
My guess is the development office would turn down the money, rather than accept the OP’s strings. The OP’s criteria is too weird. While a lot of scholarships have minimum GPAs, I can not remember ever seeing a scholarship with a maximum GPA. I can’t remember ever seeing a scholarship where playing a sport would be a disqualifying factor.
afan
Posts: 5203
Joined: Sun Jul 25, 2010 4:01 pm

Re: Setting up and Managing a Private Foundation

Post by afan »

Strange incentive to a student to tank some exams to avoid ending up with too high a GPA and losing their scholarship.

I can understand wanting to focus on people who people who do not play sports. At least at schools that have athletic scholarships, there is already a big pile of money available only to them.

I never got the desire to be memorialized for a gift. My alma mater would be happy to have money for scholarships. It might accept some specifics, maybe even these. Going through all this to have that level of control means that a large amount of money will go to jumping through the hoops, rather than helping students. Sounds wasteful but if these specific criteria are important enough I suppose one could decide that it is worth spending less on scholarship and more on fees and taxes to get there.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
oldfort
Posts: 1731
Joined: Mon Mar 02, 2020 8:45 pm

Re: Setting up and Managing a Private Foundation

Post by oldfort »

afan wrote: Fri Jun 19, 2020 2:48 pm I can understand wanting to focus on people who people who do not play sports. At least at schools that have athletic scholarships, there is already a big pile of money available only to them.
In the ballpark of 55% of high school students play team sports. You want to exclude 55% of high school students from a scholarship opportunity because 2% of them will get a college athletic scholarship?
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

afan wrote: Fri Jun 19, 2020 1:25 pm Reproducing your background must be really important to you.

It would be vastly simpler and more of the money would go to a charitable purpose if you gave the money to the college. The development office would be happy to speak with you about what requirements it would be able and willing to apply.
In my conversation with a particular state university foundation development office she only knew how to give to the general fund or endow a scholarship.

Part of my goal in life is to do the things I want to do. If they are not the simplest, that's okay with me. I want to give the money/scholarship to the people I choose, not to something controlled by others, even if they pinkie-promise to take my input.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

oldfort wrote: Fri Jun 19, 2020 3:15 pm
afan wrote: Fri Jun 19, 2020 2:48 pm I can understand wanting to focus on people who people who do not play sports. At least at schools that have athletic scholarships, there is already a big pile of money available only to them.
In the ballpark of 55% of high school students play team sports. You want to exclude 55% of high school students from a scholarship opportunity because 2% of them will get a college athletic scholarship?
I do. Sports is a waste of time. America and many countries are far too obsessed with football or futbol or other sports. I want to encourage people to focus on learning and production, not sports.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
Flora
Posts: 112
Joined: Sat Mar 26, 2016 6:19 am

Re: Setting up and Managing a Private Foundation

Post by Flora »

I looked at your spreadsheet and have a few comments.

1. (FYI) A Private Foundation can avoid excise tax on the appreciated stock by distributing the appreciated stock itself (instead of selling it, realizing a gain, distributing cash). Obviously you can't give away shares of stock as a scholarship though.

2. A Private Foundation has until the end of the following year to meet the distribution requirement so in Year 1 you can show $0 going out to charities/to scholarships.

3. If a calendar year PF entity is formed late in the year (you just need to contribute the appreciated stock by 12/31 and issue yourself a signed donor acknowledgment letter to take the deduction on your 1040) then the average of the monthly averages of the FMV of the assets (and short tax year calculation) is very small so that 5% amount that must be distributed out by the end of the following year is very small too. In other words the $1M can have practically 2 years to grow before the PF has to distribute out the full 5% of the calculated value.

4. Note that if the PF distributes out more than the minimum, the excess is carried over up to 5 years.

Other comments :

A PF cannot carryover capital losses.

The penalty for failure to distribute the minimum is 30% of the amount not distributed.

I have read about lower income students who receive scholarship checks and their parent or parents make them spend some on family bills so I'd suggest sending the check to the college directly upon proof of enrollment.
Last edited by Flora on Fri Jun 19, 2020 3:34 pm, edited 1 time in total.
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

Flora wrote: Fri Jun 19, 2020 3:29 pm I looked at your spreadsheet and have a few comments.
Very helpful and thank you. This wealth of wisdom shared by you and others is very helpful now and in the future.

I assumed my model was not accurate (ergo model ;-) ) but I wanted to verify the ballpark numbers.

Thank you again.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
afan
Posts: 5203
Joined: Sun Jul 25, 2010 4:01 pm

Re: Setting up and Managing a Private Foundation

Post by afan »

oldfort wrote: Fri Jun 19, 2020 3:15 pm
afan wrote: Fri Jun 19, 2020 2:48 pm I can understand wanting to focus on people who people who do not play sports. At least at schools that have athletic scholarships, there is already a big pile of money available only to them.
In the ballpark of 55% of high school students play team sports. You want to exclude 55% of high school students from a scholarship opportunity because 2% of them will get a college athletic scholarship?
I was referring fo people who play intercollegiate sports.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
inbox788
Posts: 7582
Joined: Thu Mar 15, 2012 5:24 pm

Re: Setting up and Managing a Private Foundation

Post by inbox788 »

mgensler wrote: Fri Jun 19, 2020 9:01 amWe have both a DAF and a Private Operating Foundation.
Thanks for providing addition detail for a strategy I had heard about.
afan wrote: Fri Jun 19, 2020 1:25 pmLasting for hundreds of years:
Low single digit millions make that unrealistic.
We don't know whether the Ford, Rockefeller or Gates foundations will last that long.
You don't know whether your next generation will want to deal with it, let alone what will happen long after you are gone.
Mathematically, limiting the withdrawal rate or using a variable withdrawal rate should allow an endowment to go on indefinitely. Practically, a number of problems can derail things. High management and other costs, poor investment returns, mission creep, mismanagement or malfeasance, and other risks can drive the endowment towards zero. On the other hand, too small a spend could wind up with the fund growing too big and becoming a attractive nuisance that some folks can't keep their hands off.

It's all about maintaining control of everything (investments, expenses and taxes, program guidelines, selection process, etc.), and realizing your limits of what you can do beyond the grave. Easier to do more hands on when you're around, and hand off to trusted people and organizations for the long haul.

I looked at a couple of community foundations and didn't like the up to 1.5% fees charged and couldn't find any return info. I was also concerned about the fund's survival as well as the organization's long term survival. I'll have to learn more about this option.
oldfort
Posts: 1731
Joined: Mon Mar 02, 2020 8:45 pm

Re: Setting up and Managing a Private Foundation

Post by oldfort »

afan wrote: Fri Jun 19, 2020 3:45 pm
oldfort wrote: Fri Jun 19, 2020 3:15 pm
afan wrote: Fri Jun 19, 2020 2:48 pm I can understand wanting to focus on people who people who do not play sports. At least at schools that have athletic scholarships, there is already a big pile of money available only to them.
In the ballpark of 55% of high school students play team sports. You want to exclude 55% of high school students from a scholarship opportunity because 2% of them will get a college athletic scholarship?
I was referring fo people who play intercollegiate sports.
I think the OP wants to exclude anyone who plays high school sports.
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

mgensler wrote: Fri Jun 19, 2020 9:01 am We have both a DAF and a Private Operating Foundation. We donate appreciated stock to the DAF and invest it there according to our IPS. We make donations from the DAF including to our Private Operating Foundation. The foundation only has a checking account. The foundation can then run it's own programs according to IRS rules.
...
Make sure you research Private Operating Foundation and not Private Foundation.
Wow. This is excellent. I didn't know about this option. Researching now...

...
N. PRIVATE OPERATING FOUNDATIONS 1. Introduction In ...
www.irs.gov › pub › irs-tege › eotopicn84
PDF
An organization providing scholarships to individuals without otherwise conducting educational activities of its own is not an operating foundation. See. Reg.
Ugh.
Last edited by NewMoneyMustBeSmart on Fri Jun 19, 2020 4:09 pm, edited 1 time in total.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
oldfort
Posts: 1731
Joined: Mon Mar 02, 2020 8:45 pm

Re: Setting up and Managing a Private Foundation

Post by oldfort »

inbox788 wrote: Fri Jun 19, 2020 4:03 pm
mgensler wrote: Fri Jun 19, 2020 9:01 amWe have both a DAF and a Private Operating Foundation.
Thanks for providing addition detail for a strategy I had heard about.
afan wrote: Fri Jun 19, 2020 1:25 pmLasting for hundreds of years:
Low single digit millions make that unrealistic.
We don't know whether the Ford, Rockefeller or Gates foundations will last that long.
You don't know whether your next generation will want to deal with it, let alone what will happen long after you are gone.
Mathematically, limiting the withdrawal rate or using a variable withdrawal rate should allow an endowment to go on indefinitely. Practically, a number of problems can derail things. High management and other costs, poor investment returns, mission creep, mismanagement or malfeasance, and other risks can drive the endowment towards zero. On the other hand, too small a spend could wind up with the fund growing too big and becoming a attractive nuisance that some folks can't keep their hands off.

It's all about maintaining control of everything (investments, expenses and taxes, program guidelines, selection process, etc.), and realizing your limits of what you can do beyond the grave. Easier to do more hands on when you're around, and hand off to trusted people and organizations for the long haul.

I looked at a couple of community foundations and didn't like the up to 1.5% fees charged and couldn't find any return info. I was also concerned about the fund's survival as well as the organization's long term survival. I'll have to learn more about this option.
Didn't someone say above a foundation has to spend 5% of its assets each year to maintain its tax exempt status? It can't limit its withdrawal rate to 2% so it lasts forever.
Topic Author
NewMoneyMustBeSmart
Posts: 376
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Setting up and Managing a Private Foundation

Post by NewMoneyMustBeSmart »

oldfort wrote: Fri Jun 19, 2020 4:09 pm Didn't someone say above a foundation has to spend 5% of its assets each year to maintain its tax exempt status? It can't limit its withdrawal rate to 2% so it lasts forever.
Yes. The IRS says that...

What they actually say is that if you donate at least 5% of your average monthly balance, you don't pay a tax on failure to distribute income which I understand to be 30% of that which should be donated. So in theory you can pay reduce the withdrawal rate to the 1.5% tax amount. But that's nonsensical.

Ultimately for the foundation to last it needs to make more money than it costs; which means it needs to generate ~6% per year which is a little tough to rely on for sure.

(added later)

https://www.rubinbrown.com/article/3338 ... group=1117
If a private foundation fails to distribute the required 5% by the end of the subsequent fiscal year, it is subject to a 30% excise tax on the undistributed amount. If the required amounts remain undistributed, the foundation may be subject to an additional 100% excise tax on the undistributed amount.
So maybe you can't just pay the 1.5% and move on - looks like ultimately the IRS will tax the whole thing if not deployed.

And some wisdom from the same source on viability of future operation....
Consequences for Private Foundation Investment Portfolios

Most private foundations are formed with the intent they will exist indefinitely. To do so, a foundation’s investment portfolio must earn a long-term rate of return that exceeds both the inflation rate as well as the 5% distribution rate. As a result, most private foundations invest heavily in stocks and other equity instruments, since historically equities have produced much higher long-term rates of return than bonds or debt instruments. As part of RubinBrown’s 2013 Not-For-Profit Economic Outlook survey, we reviewed the Forms 990-PF for 28 of the largest private foundations in the St. Louis, Kansas City and Denver regions. Our research indicated that, on average, private foundations invest 56.4% of their investment portfolios in stocks and equity instruments.

However, while equity instruments do generally earn higher rates of return than debt instruments, returns on equity investments are subject to much more volatility from year to year. To illustrate this, consider the total return (including capital and income) for the S&P 500 index for the last ten years, as displayed in the table below:
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
inbox788
Posts: 7582
Joined: Thu Mar 15, 2012 5:24 pm

Re: Setting up and Managing a Private Foundation

Post by inbox788 »

oldfort wrote: Fri Jun 19, 2020 4:09 pmDidn't someone say above a foundation has to spend 5% of its assets each year to maintain its tax exempt status? It can't limit its withdrawal rate to 2% so it lasts forever.
I believe so for a foundation or charitable organization. A DAF too is a charitable organization, but that 5% requirement is across the board, so an individual account can be below that, and if you transferred 2% from your DAF to your POF every year, it should last a long long time. This works because many people use the DAF as a pass thru account. There is a clause that if the total donations for the DAF are less than 5%, they can top it off to meet the requirement, but I don't think they've ever been close to needing to do that. (Technically, you might even qualify by transferring/donating back and forth between/among Fidelity Charitable, Vanguard Charitable and/or other DAFs)
Zombies
Posts: 106
Joined: Sat Jul 15, 2017 6:22 pm

Re: Setting up and Managing a Private Foundation

Post by Zombies »

As said above, this really seems too small for a PF. My father wanted to leave $2-3M for his kids to direct in a PF, and after researching this I have strongly urged him to do so to a DAF instead upon which we can recommend distribution according to his wishes. You lose some flexibility but it is far simpler, and if you want this to outlive you think about whether others will want to continue it on in the same level of effort. Giving away hundreds of thousands in a DAF is a few clicks; reviewing scholarship applications, dealing with tax attorneys, investment changes, etc. is another whole ballgame for someone who is not you.
Post Reply