Foundation basics

What are the benefits of establishing a private foundation?

People primarily establish foundations to make the world a better place, but launching a private foundation also offers substantial advantages for the founders. Let's delve into these benefits for families that establish private foundations.

Tax Advantages

The primary advantages that accrue to the founders and funders of private foundations are associated with the U.S. tax system. Typically, when you make charitable contributions to private foundations, you become eligible for an income tax deduction in the year of your donation. For an in-depth exploration of the tax advantages linked to private foundations, please refer to this guide.

Continued Family Control Over Assets

With a private foundation, the founder typically selects family members to serve on the board of directors, granting the family significant control over the foundation and its assets. Over time, new board members are often chosen exclusively from succeeding generations, ensuring the family's continued control over the foundation. This control sets private foundations apart from regular public charities, which require independent boards of directors. While the foundation must use its assets for charitable purposes, the family determines how the charitable mission is executed and which causes receive support.

Opportunity to Build a Professional Organization

Private foundations have the flexibility to develop into robust organizations, with a dedicated team of skilled professionals collaborating to achieve the foundation's charitable mission. The organization can hire qualified staff and engage paid third-party experts. Private foundations even have the option to employ family members as paid staff, provided their wages align with "reasonable compensation" for the services rendered. Of course, paying family members is purely optional, and many families choose to volunteer their time to manage the foundation in order to keep administrative costs low.

Beyond staffing, private foundations can cover all reasonable and necessary expenses required to further their mission. This includes salaries and benefits for staff, office space, administrative costs, and other expenses necessary for the foundation's operations. Private foundations can also operate their own programs and initiatives designed to address specific issues (running a museum for example). For smaller foundations that may operate with less formal processes, in the event that any of these expenses are accidentally charged to a personal credit card, the foundation has the option to reimburse the individual responsible for the inadvertent payment.

Private foundations enjoy considerable autonomy to establish an organizational structure capable of achieving their mission. The founder and the directors of a foundation can actively work to strengthen the foundation, making it more impactful and transformative, akin to an entrepreneur improving their business. As a result, private foundations can endure long after the original founder has passed away, with many foundations operating today having existed for over a century.

Collaborative Impact

Private foundations offer the potential for collaboration with other charitable organizations, both public and private, thereby enhancing their impact through the pooling of resources, expertise, and networks. This collaborative approach often leads to innovative solutions and broader-reaching outcomes. Private foundations frequently collaborate with like-minded organizations to tackle complex societal issues, harnessing the successes of other foundations with established and effective programs.

Innovative Approaches to Entrenched Problems

Private foundations often play a pivotal role in catalyzing innovative approaches to address complex social challenges. Unlike some traditional funding sources, private foundations have the flexibility and autonomy to take risks and invest in unconventional solutions. As such, they often serve as incubators for pioneering ideas and initiatives that may not fit within the confines of more rigid funding models. By providing financial support, technical expertise, and strategic guidance, private foundations can empower visionary thinkers and organizations to explore uncharted territories. This enables them to develop and refine groundbreaking approaches to longstanding societal issues.

Familial Benefits

A well-run private foundation can provide familial benefits that may not be immediately apparent but are nonetheless significant. Perhaps the most straightforward familial benefit is that the charitable activity of the foundation enhances the family's reputation and fosters goodwill. Some foundations focus on supporting regional areas, such as a home state or hometown, which enhances their local reputation. The charitable initiatives undertaken by the foundation can weave a tapestry of goodwill and positive impact that often become an integral part of the family's legacy.

Additionally, foundations provide other familial benefits, such as:

Developing Practical Skills in the Younger Generations:

A private foundation can serve as an excellent training ground for young family members to acquire practical life and business skills. Whether the foundation has a robust organizational structure with employees or operates with leaner infrastructure, valuable skills can be developed. Even simple actions like public speaking during board meetings or participating in brainstorming sessions contribute to skills such as leadership and teamwork. Moreover, seeing that a foundation’s endowment is almost always invested in public securities markets, helping with a foundation can be a great way to expose the younger generation to investment management. Through active participation in the investment committee, young individuals not only acquire a grasp of the academic principles of investing but also gain invaluable real-life experience in witnessing the real-time management of a portfolio. This is especially significant given that formal education on investing and money management is rarely taught in schools.

Passing Along Important Family Values:

Family philanthropy, as facilitated by a private foundation, serves as a strong example to younger generations of the values held by the elder generation. The foundation's very existence is a testament to the founder's charitable spirit, emphasizing the importance of giving back. These values are not just words but are tangibly expressed through the foundation's charitable grants and mission statement, leaving an indelible impression on the younger generation. This transfer of family values gains even more strength when family members actively participate in the foundation's activities from an early age. The cycle of philanthropy continues as younger family members ascend to roles on the board of directors, ensuring the charitable legacy continues.

Bolstering Family Ties:

In today's modern world, families often face a myriad of forces that seem to drive them apart. Yet, a family foundation has the capacity to bring families closer together. Family foundations can act as a unifying force, akin to mortar, that binds individuals into a more cohesive and connected family.

In an era where families frequently scatter geographically, especially as younger generations pursue higher education or careers across the country, private foundations offer a compelling reason for family members to stay connected. Through the regular meetings and collaborative efforts required to operate a foundation, family members find a meaningful way to engage with each other beyond the confines of traditional family gatherings and holidays.

Achieving Increased Self-Fulfillment:

Research consistently demonstrates that donating to charity and participating can serve as potent catalysts for happiness and personal fulfillment. This lends undeniable credibility to the age-old adage, "it is better to give than to receive." Research has illuminated a clear connection between charitable giving and heightened activity in the brain regions associated with pleasure and contentment. Remarkably, the positive effects of helping others have been shown to surpass the impact of more conventionally "fun" activities, such as watching TV or playing video games.

In this context, family philanthropy not only deepens the connection within the family but also forges stronger ties between the family and the broader community. This communal engagement carries a unique and profound sense of satisfaction, contributing significantly to the overall well-being of those involved.

Flexible Giving Options

Private foundations offer highly flexible giving options, surpassing other charitable vehicles in this regard. The primary way foundations fulfill their charitable mission is by providing grants to public charities with the 501(c)(3) designation from the IRS, as well as to religious organizations like churches, synagogues, and mosques.

Foundations have the choice of accepting grant proposals or selecting charities to fund through an internal process. In addition to these standard grants, foundations can pursue various other giving options, such as:

Direct Grants to Individuals and Families in Need:

Private foundations have the option of directly providing grants to individuals and families in need. The most common kind of support that foundations provide to individuals is in the form of emergency assistance and disaster relief. In general, foundations can provide direct economic hardship assistance as long as it furthers the foundation’s charitable mission and the recipient is needy or distressed.

An essential aspect to note here is that when the foundation extends grants using endowment funds, the original donor of the funds receives a tax deduction. However, if the original donor gave the funds directly to someone in need, then no tax deduction would be available. For example, if Johnny B. Good, a private person, gives money directly to help Hard-Knock Harry by writing a personal check, then Johnny cannot claim a tax deduction. However, if Johnny instead contributes the money to a private foundation, which in turn provides a grant to Harry, then Johnny can claim a deduction.

Scholarship Programs:

Private foundations have the legal authority to establish and administer scholarship programs by petitioning the government for approval. This option is available to all foundations, not just those focused on education, provided that their bylaws and other governance documents permit such initiatives. Once the program is approved, the foundation has the authority to choose individual recipients as long as the eligibility criteria is non-discriminatory and does not unfairly benefit foundation insiders and their families.

Prize and Award Programs:

Private foundations have the capability to establish prize and award programs that benefit individual recipients. A well-known example is the MacArthur Fellows Program, often referred to as the "genius grants," awarded annually to individuals aged 20 to 30 who have demonstrated “extraordinary originality and dedication in their creative pursuits and a marked capacity for self-direction.” Awards like the genius grant program can help raise awareness of a given field, influence other people to launch their own innovative pursuits, and spur creativity and problem solving.

However, foundations should be cautious when setting up such a program because the rules are quite complex and there are numerous legal pitfalls for the unwary. Nonetheless, prize and award programs are a powerful and often underutilized tool available to private foundations.

International Giving:

Private foundations can make grants to international charities, even when there is no IRS-recognized 501(c)(3) entity to receive the grant. However, such grants entail additional due diligence, either through an "equivalency determination" or "expenditure responsibility."

Both due diligence options require effort and expense over and above standard grants to U.S.-based nonprofits. Any foreign giving of this kind should be of sufficient size to make it worth the expenditure of additional resources. There is a small cottage industry of certified tax practitioners available to help foundations meet the requirements to give to foreign charities.

Allocate Funds to Program-Related Investments:

Private foundations have the option to engage in program-related investments, which involve making loans and equity investments in both for-profit companies and non-profit organizations, contingent upon meeting specific conditions. program-related investments can effectively substitute traditional grants when fulfilling the annual 5% minimum distribution requirement.

What distinguishes PRIs from conventional grants is the foundation's anticipation of receiving the funds back at some point in the future, allowing for reinvestment in other charitable endeavors. This approach is deemed permissible as long as these investments align with the foundation's charitable goals, with income generation considered a secondary consideration.


In summary, private foundations offer a multitude of benefits, ranging from tax advantages and control over assets to the opportunity to build substantial organizations and pass on family values. Private foundations serve as catalysts for innovative approaches, strengthen family bonds, and provide avenues for personal fulfillment. Furthermore, they afford flexibility in charitable giving, enabling foundations to support various causes and initiatives. Whether through grants, scholarships, awards, or investments, private foundations have the capacity to make a profound and enduring impact on society while also enriching the lives and legacies of their founders and their families.

Seeking expert guidance? We're here to help!

At CPA KPA, we're passionate about magnifying the positive impact of private foundations. Feel free to reach out to us anytime at 888-402-1780 for a complimentary and obligation-free conversation. You can also conveniently submit your questions and inquiries through our contact page. Let's connect today and explore how we can help your foundation have a lasting and meaningful impact!

Other questions about

Foundation basics