FAQs Archives - Foundation Source

GrantSafe® FAQ

FS Web — Mon, 12 Dec 2022 16:15:04 +0000

What is Foundation Source and why are you offering GrantSafe^®?

Foundation Source is the nation’s largest provider of support services for private foundations. One of the services we provide to our clients is verification that the nonprofits their foundations grant to have been approved by the IRS as public charities and currently are in good standing.

To this end, we developed a proprietary database of 501(c)(3) public charities, which is constantly updated with additions and revocations as listed in IRS publications.

In June of 2011, the IRS revoked the charitable status of more than 275,000 U.S. nonprofits because they failed to file a tax return three years in a row. This caused confusion as to which organizations were still valid public charities, and created a significant concern. If a foundation donates to one of these suspect organizations, which it may have legitimately supported in the past, the foundation could now face a 20% penalty on the amount of each grant.

We believe that no philanthropists should be penalized for their good intentions. Therefore, Foundation Source decided to offer GrantSafe^® at no cost to the larger foundation community as part of our mission to encourage safe, sound and responsible philanthropy.

Is this FREE for a Limited amount of time?

No. We will continue to offer GrantSafe^® as a complimentary public service. This easy-to-use online resource allows private foundations to instantly validate the exempt status of any public charity they choose to support.

How do I know a charity is really verified?

GrantSafe^® issues certificates only for those organizations that have been granted public charity tax exempt status by the IRS. In compliance with IRS instructions, GrantSafe^® continually monitors, accesses, and makes available the most current information made public by the IRS. GrantSafe^® organizes this information into the form of a certificate, which may be maintained in the records of any private foundation. Once a private foundation obtains a certificate for a verified public charity, the private foundation can rely upon this information and make a grant to the verified public charity without having to exercise expenditure responsibility.

Is this your company’s proprietary database?

Yes. GrantSafe^®, Foundation Source’s trademarked database, is based on the IRS’s Business Master File and is updated weekly to reflect changes published in the IRS’s Internal Revenue Bulletin regarding modification or revocation of the tax statuses of listed organizations. It meets the latest IRS requirements for validating an organization’s tax status as a public charity.

Must I obtain a certificate to avoid IRS penalties?

Yes. If you obtain information about an organization’s tax-exempt status from a third party (like Foundation Source’s GrantSafe^®), rather than the IRS itself, you need a printed or electronically-stored record that includes, among other things, proof of its tax status as a public charity at the time and date of your grant. That way, if the IRS later revokes the organization’s exempt status, you can show that your foundation’s grant was based on up-to-date data from the IRS.

The charity that I give to is not in the database. Why not?

There may be several reasons why a public charity may not be in the GrantSafe^® database. The most common reason is that the charity is either a religious organization (church, synagogue or mosque) or a government entity (public school, public university or government agency). Neither of these types of organizations is required to apply for tax exempt status; therefore, the IRS may have no records of such organizations as public charities. Another reason a charity may not be found on GrantSafe^® is that the charity has either not yet received a determination letter from the IRS or the IRS has not yet made this charity’s exempt status public. In these cases, private foundations should continuously check GrantSafe^®, as the IRS makes tax exempt determinations and publishes regularly an updated list of tax exempt organizations.

I found two organizations with the same name – one with a red X and the other with a green check mark. Which one should I choose?

You should choose the organization with the green check. An organization with a green check is one that a private foundation can make a grant to without executing expenditure responsibility. An organization with a red X that has the same name is typically a private foundation, a sister supporting organization or an operating foundation. If both organizations appear otherwise identical, chances are the organization with the red X is an “old profile” on the IRS database.

I typed in an organization’s name and got back 60 search results. How can I narrow it down?

GrantSafe^® lets you add other search parameters, such as EIN and/or address (city, state and country) to narrow a search. Note that many public charities have both local and regional chapters. If there is a particular geographic area where you want your foundation’s grant dollars focused, you can pare down the list of resulting organizations by indicating your desired grant region.

Can I search by EIN?

Yes. GrantSafe^® allows private foundations to search for public charities by EIN, as well as by name, both of which appear on every certificate generated.

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Profile and Foundation Management FAQs

FS Web — Sat, 29 Oct 2022 03:47:05 +0000

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Grants Management FAQs

fsupport — Fri, 23 Sep 2022 04:56:04 +0000

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Frequently Asked Questions About Private Foundations

FS Web — Sat, 21 Sep 2019 07:23:37 +0000

Getting Started

General Questions About Private Foundations

What is a private foundation?

Technically, a private foundation is a not-for-profit entity that is controlled by, and receives most of its funding from, a single individual, family, or business. It is organized exclusively for charitable, educational, religious, scientific, or literary purposes under Section 501(c)(3) of the Internal Revenue Code. A foundation must apply to the IRS to obtain official recognition of its tax-exempt status.

In practice, a private foundation is a unique charitable giving vehicle that provides significant control over assets and giving, allows donors to receive an immediate tax deduction for charitable donations made in the future, and fosters family engagement.

Private foundations provide significant control over assets and giving, allow donors to receive an immediate tax deduction for charitable donations made in the future, and foster family engagement.

What is the tax deduction for donations to a private foundation?

Typically, donations to a private foundation are tax deductible up to 30% of adjusted gross income (AGI) for cash, and up to 20% of AGI for appreciated securities (as long as the donation is “qualified stock” that is held for at least one year), with a five-year carry forward.
Other types of assets, including real estate, may be donated to the foundation, but are subject to limitations. Consult with your tax advisor about the deductibility of your contributions.

What are the benefits of a private foundation?

Family Legacy

When you establish a private foundation, you begin a tradition of giving that can extend far beyond your lifetime, linking your name in perpetuity to your good works.

Control

Private foundations provide the greatest control of any charitable giving vehicle. You decide which charities to support, who sits on the board, and how your donated funds are invested. You also have great latitude as to the types of assets you can put in the foundation.

Family Involvement

A private foundation enables you to involve your spouse, children, and other relatives in philanthropy, and pass values on to future generations.

Current Tax Deduction for Future Grants

You may take an immediate tax deduction for contributed assets, even if the foundation does not make charitable grants until a later date. Contributions to a private foundation also enable you to remove taxable assets from your estate without incurring capital gains taxes. Consult with your tax advisor about your specific tax situation.

A private foundation enables you to involve your spouse, children, and other relatives in philanthropy, and pass values on to future generations.

May family members be involved in the foundation?

Yes. By appointing a spouse, children, and other family members as officers and directors, the foundation can be used to bring the family together and pass on philanthropic values to younger generations.

To help increase involvement by family and friends, Foundation Source has created a unique giving tool called “Grant Certificates” to allow the foundation to give limited granting rights to those who don’t have an official role in the foundation.

Who may establish a private foundation?

Generally, the founder of a foundation wishing to serve as a director or as a trustee must be at least 18 years old.

How does a private foundation compare to a donor-advised fund?

At the most basic level, a donor-advised fund is an account in a public charity, whereas a private foundation is a wholly distinct legal entity. Beyond this, the differences mainly revolve around control and flexibility. Contributors to a donor-advised fund make irrevocable contributions to the public charity that administers that fund and makes decisions regarding its investments. Contributors may recommend eligible charities as grant recipients, but the donor- advised fund’s governing body is free to accept or reject any grant recommendation.

At the most basic level, a donor-advised fund is an account in a public charity.

With a private foundation, donors retain control over charitable donations and other disbursements. They may hire staff, reimburse expenses, set up scholarship and award programs, and make grants directly to individuals in times of need. Donors may also contribute a much wider variety of assets to fund the foundation, such as closely held stock, partnerships, and real estate, while retaining control over how the assets are invested.

Private foundations are now as easy to set up and run as a donor- advised fund. Thanks to advanced technology and outsourced services that automate and simplify the way private foundations are operated, donors can set one up in a matter of days, and enjoy the control and flexibility that only a private foundation can offer without any of the traditional complexities.

Why does Foundation Source set up new foundations as corporations instead of trusts? And why does it incorporate new foundations in Delaware?

Foundations set up as corporations have greater flexibility than those set up as trusts. A corporation’s governing instruments can be more readily altered to reflect changing circumstances and needs, and a corporation provides directors with greater protection from liability.

There are three main benefits to setting up a foundation as a Delaware corporation:
1. Delaware has well-defined statutory provisions in place with respect to indemnification of officers and directors.
2. The state allows for sole-director corporations. This means the founder may run the foundation as the only individual on the board of the foundation, if they choose.
3. Delaware allows annual meetings, which are required of all foundations, to be held via telephone or Internet instead of in person. This convenience is important for many foundations— especially those with members who live far apart.

If your attorney would prefer to set up your foundation as a trust, or using a different state of incorporation, we can still provide our services once your foundation is established.

How long does it take to obtain a new private foundation?

With our streamlined systems and processes, Foundation Source can deliver a new foundation in as few as three business days. If you were to use a conventional setup process, obtaining a new foundation might take weeks or even months.

How much personal time is involved in administering a private foundation?

Foundation Source was established to free you, the donor, from administrative hassles, so you can spend time on more important matters, such as your foundation’s mission and philanthropic strategy. We file taxes, monitor compliance, handle back-office responsibilities, and provide each foundation with a consolidated dashboard powered by our robust technology platform and a dedicated Private Client Advisor who serves as a single point of contact for all of our in-house experts and resources. Your involvement level is up to you.

What is the minimum size for a foundation?

The conventional wisdom used to be that the set-up and administrative costs of a private foundation made it impractical for a donor with less than several millions in initial funding.

Thanks to comprehensive, outsourced services developed by Foundation Source, private foundations are much easier and less expensive to administer. In fact, it is now practical to establish a new foundation with less than $1 million in initial funding.

Does Foundation Source provide services to established foundations?

Yes, absolutely. Foundation Source provides technology solutions, back-office support and expert guidance to many of the nation’s top private foundations. Whether your foundation has been in existence for one, 10, or 100 years, we can lift administrative burdens, deepen family engagement, and provide new capabilities to magnify your philanthropic impact.

Grantmaking

Questions About Giving

Is there a minimum or maximum amount a private foundation must give away each year?

There is a minimum but no maximum requirement for giving. The IRS requires that private foundations pay out at least 5% of the previous year’s average net assets for charitable purposes. This may include administrative expenses associated with running the foundation, including Foundation Source’s fees (see “How May Foundation Assets Be Used?” on page 18). Foundation Source calculates the required annual distribution on a daily basis and posts it on each foundation’s secure dashboard.

The IRS requires that private foundations pay out at least 5% of the previous year’s average net assets for charitable purposes.

May a private foundation conduct its own charitable programs directly instead of through a public charity?

Yes, definitely, and donors don’t have to set up a separate nonprofit or convert to an operating foundation in order to do so! Though most foundations primary make grants to nonprofits, a growing number have chosen to get more hands-on in running their foundation’s own programs. So long as a foundation’s program would be regarded by the IRS as charitable—such as a soup kitchen for the needy— a foundation may directly conduct its own program and treat its related expenses (supplies, salary, rent, etc.) as part of the minimum distribution requirement. Generally, a foundation should consult its legal advisor to ensure that a program would be regarded by the IRS as charitable for tax purposes.

Grantmaking:
What kinds of donations are legal?

Private foundations typically carry out their philanthropy by making grants to recognized public charities. These include religious, educational, scientific and cultural institutions; poverty relief agencies; or any other organization that qualifies as a 501(c)(3) charity according to the IRS.

Foundation Source provides its clients with an online database of more than 1.5 million IRS-approved charities that they can use to research potential grantees. Foundation Source performs due diligence on each grantee, as required by the USA PATRIOT Act and the Office of Foreign Assets Control (OFAC), which preclude organizations and individuals suspected of, or known to be, engaging in criminal, terrorist, or other illicit behavior from receiving financial contributions from private foundations. (The USA PATRIOT Act and OFAC sanctions apply to donor-advised funds and individuals as well.)

Public charities include religious, educational, scientific and cultural institutions; poverty relief agencies; most federal, state, and local governments; or any other organization that qualifies as a 501(c)(3) charity according to the IRS.

Although making donations to public charities may be the cornerstone of private foundation giving, private foundations are entitled to make donations to other types of entities and even to individuals. For example, federal, state, and local governments are treated as the equivalent of a public charity if the donated funds are used strictly for charitable purposes. Private foundations may also provide scholarships and make grants directly to individuals for hardship, emergency assistance, and medical distress as long as they meet certain IRS criteria. Additionally, grants may be made to non- charities (e.g., a for-profit bakery that employs homeless individuals) if those funds are applied solely to charitable purposes and the foundation adheres to IRS procedures for performing due diligence prior to the grant by entering into a grant agreement with special terms, and by exercising oversight over the expenditure of such funds. Foundation Source can assist clients in understanding these procedures and can facilitate these grants.

May a private foundation make grants for political activities?

IRS rules generally prohibit private foundations from making grants to political campaigns or to organizations that exist to influence legislation and voting.

How do private foundations learn about charitable organizations?

Foundation Source provides an online database of more than a million IRS-approved public charities that our clients can use to research potential grantees. This database provides information on nonprofit finances and activities, copies of tax returns, mission statements, board members, directors’ salaries, and more. If a client is interested in making a grant to an eligible organization that is not in our database (e.g., a church, school, or governmental unit) our legal team will research the charity to verify its exempt status.

How do I manage grant requests from charitable organizations?

Foundation Source’s online grants management system, Foundation Source Applications, makes it easy to accept, organize, review, track, and reply to charitable requests. This optional service includes a public-facing landing page hosted by Foundation Source, an online eligibility quiz to filter out inappropriate applicants, online application, proposal and correspondence management, activity tracking, preparation of grant checks and transmittal letters, customized reports, and more.

Foundation Source Applications makes it easy to accept, organize, review, track, and reply to charitable requests.

How would my foundation make charitable donations using Foundation Source?

You can make grants quickly and easily through your secure foundation dashboard powered by Impactfully, our robust technology platform. Once you decide which charities will receive grants, we send a check with a grant letter to each charity or directly to you for personal presentation. Your grant letters are part of your digital archives and can be accessed via your foundation’s dashboard.

Compliance

Questions About What Is and Isn’t Permissible

How may foundation assets be used?

Foundation assets may be used for charitable purposes and certain administrative expenses. Annually, private foundations are required to distribute at least 5% of the previous year’s average net assets. Qualifying distributions from the foundation include grants to public charities, administrative expenses, or other costs related to carrying out the foundation’s charitable purpose (e.g., computers, office furniture, a building to house the foundation). Investment management fees, custodial fees and salaries or board meeting expenses to oversee investments do not count toward the foundation’s minimum distribution requirement.

What sort of investments may a private foundation make?

Subject to certain limitations, foundations may invest in nearly any type of assets (partnerships, closely held stock, hedge funds, etc.), and foundation members may follow any investment strategy they want as long as they follow the prudent investor rules (i.e., don’t take extreme risks with those funds, diversify the assets, and invest the assets prudently).

Foundation members may follow any investment strategy they want as long as they follow the prudent investor rules.

In order to prevent the taxation of capital gains, dividends, and interest at for-profit tax rates, foundations should take care not to purchase investment assets using borrowed funds, such as with a margin account. Also, foundations considering an investment in a partnership similarly should first ask the partnership if it expects its exempt partners to recognize “unrelated business taxable income,” which likewise is taxed at for-profit income tax rates.

May my family or I engage in transactions with the foundation?

The IRS forbids using one’s position within the foundation for personal gain (“self-dealing”). Foundation insiders (“disqualified persons”) cannot transact with the foundation other than to make donations to it, or under limited circumstances, receive fair market value compensation for personal services (see “May I or Members of My Family Be Employed by My Foundation?” on page 20).

Examples of self-dealing include:

Purchasing items from or selling items to the foundation.
Personal use of foundation assets or income.
Borrowing money from the foundation.
Retaining foundation assets (e.g., paintings) on private premises.
Leasing space to or from the foundation.
Using foundation assets to honor the personal pledge of a disqualified person.

Generally, disqualified persons include: (i) a foundation’s officers, directors, trustees, and substantial contributors; (ii) individuals who own a significant stake in a company that is a substantial contributor; (iii) the family members of these individuals; and (iv) certain businesses partially or wholly owned by these individuals.

Family members include a disqualified person’s spouse, ancestors (e.g., parents, grandparents), lineal descendants (e.g., children, grandchildren) and their spouses.

May a private foundation own all or part of a family business?

Although a foundation may own up to 20% of a family business without penalty, the IRS has established rules against excess business holdings to keep a private foundation from owning a more significant stake. We advise you to consult with your legal or tax advisor on any family business issues.

May I sell family assets to my foundation?

Because the IRS prohibits foundation insiders (“disqualified persons”) from engaging in transactions with the foundation, you can donate your family assets, but you can’t sell them to your foundation.

May I or members of my family be employed by my foundation?

Yes, provided that these individuals are qualified for the position, the compensation is reasonable and necessary, and the foundation follows rules governing compensation to insiders. By appointing children or other family members as officers or directors, you will have the option of making the foundation business a family affair.

By appointing children or other family members as officers or directors, you will have the option of making the foundation a family affair.

However, paying yourself or family members requires strict adherence to detailed IRS rules to avoid legal complications and self-dealing penalties. Before paying compensation to family members, you should have your attorney review your foundation’s charter documents and applicable state law to ensure that compensation is permissible.

Further, you should take steps to ensure that compensation decisions for foundation insiders are made by disinterested persons based upon an objective benchmarking analysis to establish and document the reasonableness of their compensation. Foundation Source can help clients understand the relevant regulations and can facilitate these procedures through its Compensation Benchmarking Process.

May a private foundation reimburse expenses incurred by disqualified persons in connection with foundation business?

Although personal expenses cannot be paid or reimbursed by the foundation, reimbursement of foundation-related expenses (such as conference attendance, office supplies, travel to a board meeting, or hiring an expert) by incurred insiders may be permitted, provided that the expenses are reasonable and necessary to carry out the foundation’s exempt purposes. Foundations that make expense reimbursements should adopt suitable policies
and guidelines.

Working with Foundation Source

Does Foundation Source manage the foundation’s assets?

No, we do not provide financial advice nor do we manage or custody assets. Financial control rests entirely with you, your wealth advisor, and your financial institution. Our role is to take care of everything else you need to keep your foundation running smoothly and compliantly: grants processing and recordkeeping, tax preparation and filing, compliance guidance, and philanthropic advisory services.

Does Foundation Source provide financial, legal, or tax advice? May I keep my current advisors?

Foundation Source does not provide financial, legal, or tax advice. We will work with your trusted advisors, or we can provide you with the names of specialists in these areas.

How do I get information about foundation activities and view account statements?

Foundation Source provides a secure dashboard for each foundation to access account balances, foundation documents, grant history, pending grants, year-to-date donations, extensive reports and more. Foundation Source holds all foundation data in the strictest confidence. Our systems, processes, and procedures are designed with privacy and security as primary considerations.

Why Foundation Source?

Technology

AMPLIFY YOUR IMPACT

Our tech platform was built with one thing in mind: more effective philanthropy.

MDR Tracking
Streamlined Grant Workflows
Extensive Reporting

Expertise

YOUR PARTNER IN GIVING

Let us join you on your philanthropic journey with the experience and tools you need to reach your goals.

Tax and Legal Specialists
Philanthropic Advisory
Advanced Grantmaking Support

Administration

MODERN PHILANTHROPY STARTS HERE

Our tech-enabled solutions make giving – and having a foundation – easier.

Grant and Expense Processing
Compliance Monitoring
Tax Preparation and Filing

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