Foundations FAQ
Private Foundations - What They Are
The vast majority of funds available to grantseekers exist in private foundations. A private foundation (PF) is a nonprofit organization that is usually established and supported by an individual or family. It is tax exempt upon receiving approval from the IRS, and may be funded with cash, securities, or other assets. Today, most financial planners recommend initially funding a PF with at least $5 million. Establishing a PF is costly ($15,000 to $25,000) and time-consuming (up to 6 months); administrative costs are high.
In 2003, PFs gave over $26 billion in grants, which represents nearly 11 percent of all charitable contributions in 2003. Corporations and corporate foundations (below) gave slightly more than half that amount. The majority of giving-about 75 percent-is by individuals. Religious, educational, and health organizations, in that order, receive the majority of these funds.
A non-operating PF fulfills its exempt purposes by making grants to support charitable programs conducted by other organizations. An operating PF conducts its own programs, expending funds directly for charitable activities. Unless they also make grants, CFG does not cover operating PFs.
Private foundations are subject to a variety of excise taxes and restrictions on their activities that are not applicable to public charities. Additionally, contributions to non-operating PFs are limited to 30% of adjusted gross income and 20% for capital gain property. For public charities like Christian community foundations, the deduction level is 50% of adjusted gross income and 30% of capital gain property.
A PF may or may not have staff. The function of staff is to process, evaluate and fund grant application. If there is no staff, the applications are handled by a board, individual, or family. Many PFs also depend on the assistance of an attorney and accountant. PFs vary considerably in the amount of assets they control. Some PFs have only a few thousand dollars; others have billions. Click here for more details on Donor Advised Funds
Private Foundations - How They Work
Once a private foundation is established, it may begin receiving grant applications. Do not submit a grant application unless the foundation indicates it receives grant applications. Some foundations ask that you follow specific instructions when writing and submitting a grant; others have no policy. Once an application is received there is typically some type of evaluation process involving a meeting with the foundation staff, board or source of funding.
The written grant proposal and the actual project you propose are critical components of obtaining a grant. If the grant is accepted, funding eventually follows. Some foundations may require follow-up reports for accountability purposes. For more detail on how private foundations work, see the section entitled Applying for a Grant.
Terminating a Private Foundation
Private foundations terminate for a variety of reasons, including: (1) the family or individual loses interest; (2) the money dries up; or (3) the family converts to a donor advised fund (DAF) to escape the administrative burdens.
The termination of a PF in exchange for a DAF through a community foundation is a relatively simple process. A private foundation will be terminated if it distributes all of its net assets to a DAF. The transfer must be of all its title to, and rights and interests in, its net assets. There is no need to notify the IRS in advance. However, there is a final income tax return that the private foundation must file.
If the private foundation is liable for any taxes, the liability carries over to the community foundation. While the contribution to the community foundation cannot have any material restrictions, it is not a material restriction for the community foundation to pay these taxes (see section 507 of the Internal Revenue code and related Treasury Regulations). Consequently, a DAF established with the transfer of the private foundation's net assets can be charged with any taxes or other obligations associated with the private foundation.
Christian Community Foundations-What They Are
A Christian community foundation is a tax exempt public charity. A Christian community foundation (CCF) has many features that are different from a PF. For instance, donors may receive a greater tax deduction when contributing most assets.
Community foundations are supported by, and operated for the benefit of, a geographical (i.e., Denver) and/or religious (i.e., Christian, Jewish) community. The information provided here is equally applicable to all community foundations, of which CCFs are a significant part. In 2004, community foundations distributed over $2.6-billion. The largest CCF, National Christian Foundation, distributed nearly $170 million.
A Christian community foundation establishes donor advised funds (DAFs) for its clients. A DAF is a fund into which the donor places various types of assets. Upon transferring the assets, the donor relinquishes control to the foundation with the understanding that the foundation will follow the donor's advice regarding the ultimate disposition of the funds. One advantage of a DAF is that a tax deduction may be taken immediately, even though the funds may not be directed to a specific charity for months or years to come.
Christian Community Foundations - How they Work
An individual, family, business, ministry or church may establish a donor advised fund. A DAF is generally established by: (1) making an initial asset contribution, which can range from $2,500 to $50,000 (most community foundations require between $10,000 and $25,000); and (2) completing a form document that can be downloaded from the internet. Legal assistance is not necessary.
A DAF may be opened with cash, securities, closely held stock, real estate, various business interests, collectibles, and other non cash assets. For a complete listing of funding assets, inquire at a nearby Christian community foundation.
Giving through the fund can often be done online. The fund is administered by the Christian community foundation. This administration includes all appropriate reporting, receipting, and distributing. In exchange for this service, the CCF charges an annual fee of up to 1% of fund assets.
Once the DAF is established, the donor may make grant recommendations to tax exempt 501(c)(3) organizations. Donors should realize that the CCF maintains ultimate control over the fund. However, it is very rare that a donor's recommendation is not followed.
CCFs may also provide other products and services, such as Charitable Gift Annuities, Charitable Remainder Trusts, disposition of assets, and management of assets.
Christian Community Foundations-Private Foundation Support
Private foundations use Christian community foundations in a variety of ways, including:
- To Meet 5% Minimum Distribution Requirement-Private foundations must distribute 5% of their value each year. However, sometimes a PF has not met that requirement by the end of the year. This may occur for a variety of reasons; for instance, a ministry may have failed to meet the terms of a grant, thus forfeiting its funding. To meet the requirement, a PF may distribute funds to a DAF by December 31. The PF may then distribute (by recommendation) the funds at any time in the future.
- Anonymity-Private foundation tax returns are a matter of public record. Therefore, a PF may prefer to make grants through a DAF. Distributions through DAFs can be confidential or anonymous.
- Grant leverage-A PF may choose to distribute some of its grant monies through a DAF, and have the Christian community foundation solicit proposals from community ministries. This attracts attention to community initiatives but not the PF.
Christian Community Foundations - Where they are Located
Click here to view denominational foundations listed at the Christian Foundation Center.
Supporting Organizations
Supporting organizations are 501(c)(3) organizations created to "support" one or more public charities. Typically, donors establish supporting organizations for the purpose of making grants to other charities. Like a private foundation, supporting organizations may be established by an individual donor or a family. However, supporting organizations are not classified as private foundations, but rather as public charities. This is because supporting organizations support public charities-usually community foundations-and this close relationship provides a greater degree of supervision against potential improprieties. Private foundations are more susceptible to potential abuses because they are not subject to public scrutiny. Thus, supporting organizations are not subject to as many restrictions.
To qualify as a supporting organization, the charity must be organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of, one or more specific public charities. Furthermore, the organization must be operated, supervised or controlled by the supported organization(s). Compared to a private foundation, supporting organizations enjoy greater tax and administrative advantages. They also have their own board of directors on which the donors and their relatives and friends may serve.
Corporate Foundations
Corporate, or business, foundations can also be an excellent source of grants. Some corporations set up their own corporate foundations. Typically, these corporate foundations are utilized by larger corporations such as Wal-Mart, Ford Motor Company, and Hewlett Packard. In 2004, Wal-Mart foundation distributed over $170 million in grants, giving more than 90 percent of that amount to help local communities across the nation. Some Christian businesses-both small and large-have foundations as well.
Grantseekers should also consider applying for grants directly from corporations and other business entities. Just because a business does not have a corresponding foundation does not mean it does not make grants. Corporate foundations often follow an application process similar to that of PFs. It is essential that a grantseeker obtain the corporate foundation's guidelines. As with any foundation, relationship building with key individuals is essential.
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