Creating a charitable foundation is becoming more popular as individuals with large estates want to direct their money to specific causes. Creating a foundation is not an easy task so serious thought should be given to whether this is appropriate or not for each specific situation. There are definite advantages to a charitable foundation but there are also disadvantages and each should be considered before making the leap.
Advantage: Tax Benefits
Reducing taxable income is important in some situations. An advantage with a charitable foundation is that donors are able to make tax-deductible donations to the foundation. Also, there is a double capital gains benefit. First, capital gains are not realized when property that has appreciated in value is donated to a foundation. Second, donors can claim a charitable deduction for the full market value of appreciated stock from companies that are publicly traded. Additionally assets that are transferred to a charitable foundations are usually not subject to estate taxes. Overall, there are many tax advantages to establishing a charitable foundation.
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Creating a charitable foundation enables you to decide which causes you ultimately want your donations going to. If you give donations to large organizations they have the control over exactly how the money is used but in your foundation you can dictate where and to whom you want the money going to. As an example, if you donate your money to Organization X, it can use this money to help any of their causes or simply for administrative costs. On the other hand, if you are to donate to your own charitable foundation, you can send money to the exact cause that you want to help. This control is very appealing to some people who have a cause they are passionate about.
Advantage: Providing Income For Family And Friends
Giving money directly to family members or friends is limited due to tax implications and can be tricky overall. But within a foundation, family and friends can be paid if they provide a service. If they sit on the board, consult, or perform day-to-day functions they can be paid for their efforts. Additionally, travel and expenses can be paid for board meetings for people who provide a service to the foundation and attend the meetings.
Disadvantage: Initial Commitment
Forming a charitable foundation is not an easy task. Significant effort is required and it is strongly recommended that an attorney be involved. Additionally, there will be significant fees for: attorneys, accountants, and incorporation. According to Hurwitt & Associates, legal council for the nonprofit sector, these costs can be as much as $4,000. Also, federal and state governments require extensive amounts of paperwork to be filed to apply for tax exempt status and to determine if the foundation is legal or not. You may want to consider contacting organizations such as the Council on Foundations, a national nonprofit membership association of grantmaking foundations and corporate givers, to help you start a foundation. Overall, it is a big effort and you need to decide whether it is worth it or not to you.
Disadvantage: Ongoing Effort
Creating a charitable foundation is only half the battle. It will not run itself and requires a regular time commitment by all involved. Due to legal requirements, all grants need to be properly documented and meeting minutes need to be kept. Tax filings are required by the IRS and most states. Regular meetings are probably necessary to keep the operation functioning. It takes time to run a charitable foundation, which should be taken into consideration before starting one.