Foundations

If you’re unsure about setting up a charitable trust, as opposed to a foundation, the following information about foundations can help. There are three main types of private foundations: private-endowed, pass-through and private operating.

Private-Endowed

Private-endowed is the most common type of private foundation. The foundation’s financial assets create a principal — or endowment — that is invested, and income from the endowment is paid out annually to charity. Generally, the principal or endowment is not spent, only the investment income. Therefore the principal can increase with good investment, ensuring the foundation’s continuation and growth to meet future community needs. Private foundations are required by law to pay out annual grants and other qualifying distributions totaling a minimum of 5 percent of the fair market value of their assets.

Pass-Through Foundation

A pass-through foundation is a private grant-making organization that distributes all of the contributions it receives each year (not just 5 percent of its assets). The pass-through option may be made or revoked on a year-to-year basis.

Private-Operation

A private operating foundation uses the bulk of its income to actively run its own charitable programs or services. Examples include the operation of a museum, library, research facility or historic property. Some private operating foundations also choose to make some grants to other charitable organizations.

Since a private foundation is a charitable organization, it is exempt from federal income tax on its income, although it must pay a 1-to-2 percent excise tax on its net investment income. The gifts you make to establish a new foundation or grow an existing foundation can afford you certain tax advantages; income, gift and estate tax deductions are available under the law.