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PVW Law: The Mini Private Foundation

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The long standing recommendation for feasibility of forming a private foundation is that a donor be ready and willing to donate three to five million dollars to the foundation. Early in my career, I accepted that recommendation. The basis for the suggestion related to the complications of a private foundation as compared to alternate forms of making donations such as an outright donation or contributing to a donor advised fund. As I’m writing this article, I have in front of me a recent article from Trusts & Estates that tells advisors that their first question must be “whether the client is willing to make a significant financial commitment” to this option.

Over the past several years, I have worked with numerous clients who fit the profile of private foundation donors but aren’t at a point of being ready to donate three million. Admittedly, I have generally been an advocate of the outright donation. More recently, I evolved the concept of the mini private foundation.

It doesn’t take three million to make a private foundation relatively worthwhile. The reasons to consider a private foundation include the desire to create a charitable vehicle to which donations can be made and managed over a period of years along with the desire to involve family members and/or friends. Perhaps, there is a certain type of mission you wish to support. Just as small groups of family and friends form investment clubs, small groups can gather together to form mini private foundations.

If your goal is to simply have the best possible current charitable donation at the lowest possible cost, then the best strategy continues to be the direct donation.

If you don’t want to be actively involved in charitable activities but want to have some ability to direct distributions over a period of time, then consider a donor advised fund or a community foundation. If you want to be actively involved in a charitable mission over time, with friends or family, a foundation really is feasible.

The mini private foundation does require a commitment to expending some time as well as learning the rules governing foundations. From a cost perspective, there are initial formation costs and a filing with the Internal Revenue Service. For the most part, formation is relatively easy. The tax exempt filing with the Internal Revenue is best accomplished with professional guidance but in most instances, the cost can be kept down by working with a professional who knows how to engage the client in the process.

Operating the private foundation involves various annual filings, distribution requirements, and rules about the type of transactions that are permitted. It is extremely important for the foundation to avoid engaging in activities that are considered prohibited transactions. PVWLaw has developed astreamlined process for the formation of mini private foundations that make the use of such vehicle available for the “average” donor.


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