• The bill amends Internal Revenue Code (IRC) Section 4960, expanding the 21% excise tax on compensation exceeding $1 million. Previously, under the 2017 Tax Cuts and Jobs Act, this tax applied only to the five highest-compensated employees of a tax-exempt organization, current or former, with liability allocated proportionally among the exempt entity and related organizations via Form 4720. Starting in 2026, the tax will cover all employees—current or former—of the tax-exempt organization earning over $1 million who were employees during any taxable year beginning after December 31, 2016.¹ This means that tax-exempt organizations must now review compensation records from 2017 and onward to identify any current or former employees paid over $1 million, even if they weren’t among the top five earners in such past years.
• For example, a retired executive receiving a $1.2 million deferred payout from a related for-profit subsidiary would trigger the tax, with the subsidiary liable for its share on the $200,000 excess. This broader scope could increase compliance costs and push nonprofits to restructure compensation to avoid tax liability.² Advisors should review compensation agreements and related-entity structures to mitigate exposure.

Charitable Deduction Changes

• The bill reshapes charitable deductions for individuals and corporations. For individuals, it establishes a permanent above-the-line deduction for non-itemizers, capped at $1,000 ($2,000 for joint filers), encouraging modest giving among the roughly 90% of filers who don’t itemize.³
• For itemizers, a new 0.5% floor on adjusted gross income (AGI) applies, meaning only contributions exceeding this threshold are deductible.⁴ Carryforwards are also allowed only if this 0.5% floor is met.
• The 60% AGI limit for cash contributions to public charities is made permanent, preserving incentives for larger donations.⁵ However, the tax benefit for itemized deductions is capped at 35 cents per dollar, down from 37 cents for top-bracket taxpayers, slightly reducing high-earner incentives.⁶
• For corporations, a 1% floor on taxable income is imposed, so only contributions exceeding this threshold are deductible, up to the existing 10% limit.⁷ Independent Sector estimates this could reduce corporate charitable giving by approximately $4.5 billion annually, straining nonprofit budgets, particularly for smaller organizations.⁸
• A new nonrefundable tax credit of up to $1,700, starting in 2027, applies to donations to organizations granting scholarships to private or religious K-12 schools, potentially diverting funds from broader charitable causes.⁹

SALT Cap and Itemization Trends

• The bill raises the SALT deduction cap from $10,000 to $40,000 for filers with modified AGI under $500,000, with a 1% annual increase through 2029 (subject to a phaseout for taxpayers with incomes in excess of $500,000), before reverting to $10,000 in 2030.¹⁰ This could make itemizing more attractive for some, boosting charitable deductions for those who itemize. However, the standard deduction, permanently increased to $15,750 for single filers, $23,625 for heads of household, and $31,500 for joint filers, increased for inflation in future years, likely means that fewer taxpayers will itemize.¹¹ This trend could reduce the pool of donors claiming charitable deductions, further challenging nonprofit funding.

Endowment Tax Increase

• The bill amends IRC Section 4968, increasing the excise tax on net investment income in a new tiered structure for certain private colleges and universities with endowments exceeding specific per-student thresholds, from 1.4% to as much as 8%, effective after December 31, 2025.¹² This targets wealthier institutions, aiming to curb excess accumulation. The higher tax may pressure affected universities to adjust investment strategies or increase spending on mission-driven programs, though it could strain financial aid budgets.

Implications for the Charitable Sector

• These changes create a mixed outlook. The above-the-line deduction and higher SALT cap may encourage some giving, but the 0.5% and 1% floors, coupled with fewer itemizers, could reduce contributions, with total charitable giving ($557 billion in 2023) at risk of decline.¹³ The expanded IRC Section 4960 tax and endowment tax add financial and administrative burdens, particularly for smaller nonprofits and select universities. Advisors should counsel clients on restructuring compensation, optimizing deduction strategies, and monitoring related-entity payments to navigate these rules. The bill’s complexity underscores the need for proactive planning to sustain the charitable sector’s vitality.

The post Navigating the One Big Beautiful Bill Act: Key Tax Changes for Exempt Organizations appeared first on Foundation Source.

For starters, making GTIs lets a foundation control exactly who will receive support. (By contrast, when a foundation grants through a public charity, the charity selects the grantees.) Also, granting to individuals enables a foundation to have an immediate and direct charitable impact because there’s no middleman (a public charity) involved. For disaster relief grants in particular, there may not even be a public charity serving the impacted region, or if there is one, it might have high administrative costs, which a foundation can circumvent by making GTIs. Further, such a charity might be stretched too thin, and a foundation can help to fill in the gaps with GTIs.

Additionally, if a foundation wants to support a specific individual, to perhaps enhance the person’s special skill or talent such as writing a textbook, composing a musical score or choreographing a dance recital, GTIs are the ideal tool for doing so. This capability underscores the tremendous flexibility that private foundations offer for giving.

Can all private foundations make GTIs?

Yes, as long as a foundation’s charter documents don’t prohibit GTIs and its grant agreements don’t include funding restrictions against GTIs. For example, a foundation’s bylaws may require that the foundation make grants only to public charities or only for a specified purpose, such as cancer research, which would be inconsistent with providing disaster relief or scholarships directly to individuals.

Are there rules or requirements for making GTIs?

Yes. All GTIs must be in support of a charitable purpose and comply with foundation tax law, specifically with the IRS’s taxable expenditure rules, which impose a 20% penalty for noncompliance. These expenditure rules also require that a foundation obtain advance IRS approval if its GTIs are for travel, study or similar purposes (e.g., a scholarship, fellowship or study abroad experience). Fortunately, for foundations with GTI programs that support these purposes, advance approval is needed only for the grant program as a whole and not on a grant-by-grant basis. If any material changes are made to the program, though, the foundation would then need to obtain IRS approval of the revised program.

It’s also fortunate that the IRS does not require advance approval if foundations make GTIs to provide hardship and emergency assistance. This enables foundations to help people in need immediately and make greater charitable impact. The IRS also does not require advance approval for awards programs—as long as the awards are given in recognition of past accomplishments and do not impose conditions on how the funds must be spent by the recipient.

For GTIs that require advance approval from the IRS, when and how should a foundation pursue the approval?

A foundation may apply for advance IRS approval at any point in its life cycle. If a foundation knows from the start that it wants to make grants that will require approval, it may submit a request with Form 1023 which is the IRS’s application for recognition of exemption. Form 1023 needs to be filed within 27 months of the foundation’s formation. In our experience though, it’s not typical that a foundation knows at the very beginning of its existence that it will want to make GTIs that will require IRS approval. In this case, if a foundation wants to request approval after receiving its favorable determination letter, it would submit its request using IRS Form 8940 and would need to pay an IRS user fee that’s currently $3,500. It’s important to keep in mind that no matter when a foundation decides to apply for advance approval, it must always do so prior to making any grants that require it.

Can GTIs be given to anyone?

No. GTIs may not be given to the foundation’s “disqualified persons,” also known as insiders, which include those who run the foundation such as the directors, officers, trustees, as well as substantial contributors, and certain family members of those persons. These individuals are not allowed to reap a financial benefit from their foundations because, if they do, they’re personally subject to tax penalties. Additionally, GTIs of all types must be chosen from a “broad charitable class,” meaning a group of people that’s large enough or sufficiently open-ended to ensure that the number of people in the class cannot be reduced to a fixed list. For example, if a foundation program offers relief only to cancer patients presently in a specific hospital, that would not be open-ended enough because all of the members of the class could in fact be listed. However, the present and future cancer patients located in a defined geographical area like Washington, D.C., for example, would be an open-ended class because it’s impossible to predict who in that area will be diagnosed with cancer and eventually be added to that class. And for this reason, disaster relief GTI programs are often designed to afford relief not only to the victims of a specified disaster, but also to victims of future disasters.

How do foundations establish eligibility criteria for their GTIs?

First and foremost, the criteria must be related to the grant’s purpose. It’s also important to ensure that grant recipients are selected in a fair and even-handed way to preclude discrimination.

Does the IRS require documentation of how GTIs are given and used?

Yes. Foundations are expected to document their eligibility criteria, selection process, OFAC screening, the fact that the recipients were not foundation insiders, and any additional due diligence the foundation may have conducted. In the context of a scholarship, selection information might include a record of the grant recipient’s grades. For hardship assistance, it would include recording the grant recipient’s severity of financial need. For emergency assistance, it should include a description of the emergency experienced by the applicant. Overall, bear in mind that documentation is key.

This is a condensed, edited version of the conversation. Get full insights by watching the entire video of the presentation here. Check out our blog and white paper about GTIs as well.

The post Exploring Grants to Individuals: Clearing Up Misconceptions and Compliance Considerations for Foundations – Q&A appeared first on Foundation Source.

Private foundations are increasingly making GTIs to expedite their assistance and cast a wider net of charitable support. To grant directly to individuals and families, foundations do not need to set up a separate nonprofit, and they don’t always need to seek prior approval from the IRS. Plus, they have full control over who will receive support. (By contrast, when a foundation grants through a public charity, the charity selects the grantees.) The support foundations can provide with GTIs is more immediate and impactful because there’s no middleman (a public charity) involved.

For disaster relief grants in particular, there may not even be a public charity serving the impacted region, or if there is one, it might have high administrative costs, which a foundation can circumvent by making GTIs. Further, such a charity might be stretched too thin so a foundation can help to fill in the gaps with GTIs.

Our private foundation clients took advantage of GTIs in 2020 to help address the emergency and hardship scenarios due to the COVID-19 pandemic shutdowns. We then observed a resurgence of them in 2022 in response to challenging macro-economic conditions, and again in early 2025 in the wake of the southern California wildfires.

2. Foundations Can Give Creatively with Grants to Individuals

Making GTIs for out-of-the-box projects underscores the tremendous flexibility that private foundations offer for creative giving. With GTIs, foundations can support projects aimed at enhancing an individual’s skill or talent such as writing a textbook, composing a musical score or choreographing a dance recital.

GTIs even offer an easier way to give internationally. As an alternative to granting to foreign charities directly, which requires extensive due diligence and oversight procedures, foundations can make simple, direct grants to a national, regional or local government anywhere in the world as long as the grants have a charitable purpose, such as disaster relief.

3. The Rules Around Grants to Individuals Vary

Some types of GTIs need advance IRS approval and others don’t. Two types of GTIs that do not require IRS approval are grants designed to alleviate human suffering, such as those given in the aftermath of a natural disaster, and grants that are made in recognition of past accomplishments, such as an award for writing a brilliant and original poem.

GTIs that do require advance IRS approval include scholarships or fellowships as well as grants made to achieve a specific objective, produce a report or similar product that will be delivered in the future. Finally, GTIs made to improve or enhance a literary, artistic, musical, scientific, teaching or similar capacity, skill or talent require IRS approval, too.

Regardless of whether IRS approval is needed or not, these rules govern all GTIs:

• Grants can’t be made to the foundation’s disqualified persons, (aka “insiders” such as directors, officers, trustees, substantial contributors and certain family members of those persons), which would constitute self-dealing.
• Grantees must come from a broad charitable class—a group of people that’s large enough or sufficiently open-ended to ensure that the number of people in the class cannot be reduced to a fixed list.
• The selection criteria must be related to the purpose of the grant.
• Grantees have to be selected on a non-discriminatory basis.
• Foundations must publicize the programs so individuals other than the foundation’s own officers and directors know about them.

4. Documentation of Grant Recipients and Grant Activity is Required by the IRS

When making GTIs, foundations are expected to document their eligibility criteria, selection process, OFAC screening, the fact that the recipients were not foundation insiders, and any additional due diligence the foundation may have conducted. In the context of a scholarship, selection information might include a record of the grant recipient’s grades. For hardship assistance, it would include recording the grant recipient’s severity of financial need. For emergency assistance, it should include a description of the emergency experienced by the applicant.

To learn more about these key takeaways and other important insights, check out the full conversation here. Check out our blog and white paper about GTIs as well.

The post Exploring Grants to Individuals: Clearing Up Misconceptions and Compliance Considerations for Foundations – Key Takeaways appeared first on Foundation Source.

Many foundation managers, staff and board members understand that the self-dealing rules¹ generally prohibit a disqualified person² from entering into a financial transaction with the foundation. What is often not well understood is that, with few and narrow exceptions, they forbid the flow of any tangible economic benefits from the foundation to a disqualified person. Specifically, section 4941(d)(1) lists six prohibited acts of self-dealing between a private foundation and its disqualified persons. One of these prohibited acts is the “transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation” (emphasis added). When a foundation obtains tickets to an event, those tickets become assets of the foundation. Thus, the personal use of those tickets by disqualified persons or their family members will ordinarily constitute an act of self-dealing.

If tickets are obtained for personal use by or on behalf of a disqualified person, the Internal Revenue Service (IRS) can impose a penalty tax on the disqualified persons who engage in the act of self-dealing. The penalty, payable by the disqualified person who used the tickets (not by the foundation), will be equal to 10% of the amount involved.³ Further, the disqualified person must pay the foundation back for the ticket or otherwise correct the self-dealing violation.

WHEN A FOUNDATION OBTAINS TICKETS TO AN EVENT, THOSE TICKETS BECOME ASSETS OF THE FOUNDATION

If the self-dealing act is not undone or “corrected” within a certain period of time known as the “taxable period,”⁴ the IRS may impose confiscatory second-tier taxes, currently 200% of the amount involved. Finally, the IRS may impose an additional 5% penalty on any foundation manager who “participated” in the self-dealing transaction “knowing” that the act was self-dealing.

Use of Tickets by Non-Disqualified Persons

The threat of self-dealing exists if the individual using or benefitting from the use of a foundation ticket meets the technical definition of a disqualified person. Thus, a close personal friend of someone on the board of the foundation may not be a disqualified person and therefore would not be liable for self-dealing penalties for using a foundation ticket to attend a charity event. However, in any case where foundation tickets are used, and there is no foundation purpose for that person to attend the event, such use could result in a taxable expenditure for the foundation.

Taxable Expenditures

In addition to the prohibition on financial transactions with disqualified persons, the Code also imposes penalties on a foundation’s “taxable expenditures” (i.e., any expenditure that does not further charitable purposes5). Thus, even if the foundation’s use of an event ticket confers a benefit on someone who is not a disqualified person, that use may still violate the law if it does not further a charitable purpose. If the use of a ticket is a taxable expenditure, it carries a penalty, payable by the foundation, in the amount of 20% of the expenditure. In addition to the penalty, the IRS rules and regulations governing taxable expenditure violations require that the violation be corrected (which could include having the funds returned to the foundation), as is the case with self-dealing violations.

The “Reasonable and Necessary” Exception

Foundation board members often have excellent reasons to attend a charity fundraising event, such as a need to monitor the use of foundation grants, interact with other donors, or meet the grantee’s board and staff so they can learn more about the charity and its programs. Sometimes, a charity desires the presence of foundation representatives because they might attract other influential donors. If the economic benefit received by the disqualified person is reasonable and necessary, and in furtherance of the foundation’s charitable purposes, using the foundation tickets is allowable. Accordingly, it will not constitute self-dealing if, for example, a board member attends an event to represent the foundation in an official capacity and to carry out work that is reasonable and necessary for fulfilling the exempt purposes of the foundation.

It is important to note that the above exception to the self-dealing rules only applies to, and tickets should only used by, foundation staff, officers, directors, and others who have an official role on the foundation and attend events for foundation purposes, not for personal reasons. As such, spouses or other family members who do not serve the foundation in an official capacity, and would attend the events purely for personal reasons, are not covered by this exception to the self-dealing rules and may not use foundation tickets. Because such family members likely are disqualified persons, they could be personally liable for self-dealing penalties if they were to receive the foundation’s tickets.

Disclaiming Tickets

To avoid the risk of self-dealing altogether, some foundations will simply turn down any complimentary tickets received in connection with a grant to a nonprofit. Because the foundation can often accomplish its purposes by simply making the grant and not attending the event, refusing the tickets avoids even the appearance of impropriety. Further, this may allow the charity to sell those tickets or make them available for others to attend (e.g., prospective funders or community representatives). Alternatively, after disclaiming the tickets to a nonprofit’s event, the foundation may recommend people to whom tickets might be furnished instead—as long as it’s clear that it is entirely up to the charity to decide who is invited, and that the invitation is not conditioned upon foundation support (past or future).

Using Personal Tickets

If a foundation representative attending the charity event in an official capacity wishes to have a spouse or family member also attend the event, and that guest does not have a foundation role, it is permissible for that person to attend if he or she purchases the tickets directly from the nonprofit using personal funds. However, the ability of the family member to buy that ticket must be independent from the foundation’s gift. That is, if the charity does not ordinarily make individual tickets available for purchase and only allows the family member to buy a ticket because of the foundation’s support, IRS guidance suggests that the family member’s attendance would be considered self-dealing, even though he or she purchased the ticket with personal funds.

Bifurcation

Some foundations try to avoid self-dealing by splitting the cost of a ticket with a disqualified person. Often, tickets to fundraising events include a portion that covers the value of the food and entertainment, and a portion that constitutes the charitable contribution. Indeed, when individuals or corporations purchase such tickets, they are generally permitted to deduct the cost of the ticket less the value of any goods or services they receive. Following similar logic, many believe that it is permissible to have the foundation cover only the portion of the ticket price that represents a donation to the charity and have the disqualified person cover the portion allocable to the value of goods and services received. Perhaps surprisingly, this “bifurcation” of the ticket price has been ruled by the IRS to constitute self-dealing as well. The rationale behind the rulings is that, when the foundation covers a portion of the ticket price, the foundation is relieving the disqualified person of his or her obligation to pay the entire cost of the ticket. Because the foundation is footing a portion of the bill, the disqualified person gains access to the event at a lower cost than if he or she had simply purchased the ticket without assistance from the foundation. As stated earlier, even where a disqualified person chooses to pay the entire amount of the ticket, if tickets are only available by purchasing an entire table, it could be considered self-dealing because the disqualified person would never have been able to buy a single ticket but for the foundation’s expenditure.

IF THE ECONOMIC BENEFIT RECEIVED BY THE DISQUALIFIED PERSON IS REASONABLE AND NECESSARY, AND IN FURTHERANCE OF THE FOUNDATION’S CHARITABLE PURPOSES, USING THE FOUNDATION TICKETS IS ALLOWABLE

Treating the Value of Tickets as Compensation

An exception to the self-dealing rules is that a foundation may pay a disqualified person compensation for “personal services” if the compensation is reasonable and necessary to the foundation’s charitable operations. Personal services generally include any services that are essentially professional and managerial in nature, including foundation management, accounting, legal, investment management, and banking services. Compensation need not be only salary; it may also include fees, bonuses, retirement benefits, and other fringe benefits, as long as the total compensation package is reasonable relative to the personal services rendered.

It is possible that the foundation could give tickets to a disqualified person for personal use (including for use by family members or friends) without violating the self-dealing rules, or making a taxable expenditure, if the value of the ticket is intended as compensation to the disqualified person and is treated as income for tax purposes. Although the IRS has allowed arrangements where benefits are provided to family members of disqualified persons as part of the overall compensation arrangement for that individual, and that compensation was reasonable, such treatment has been denied where the IRS concluded that payments were not intended to be compensation and were not treated as compensation when paid. It is unclear whether characterizing the personal use of tickets as compensation can happen after the fact or if it must be determined prior to the disqualified person’s using them. Accordingly, foundations should work closely with counsel if planning to treat the personal use of foundation tickets by a disqualified person as compensation to ensure that doing so will pass muster with the IRS.

Corporate-Sponsored Foundations

Corporate-sponsored foundations have unique self-dealing concerns around the use of foundation event tickets because the pool of disqualified persons includes the corporation itself. Very often, these foundations wish to give event tickets to (or use foundation funds to purchase tickets for) directors or employees of the corporate sponsor. Typically, the foundation receives significant funding from its for-profit sponsor, making the corporation itself a disqualified person in light of its role as a substantial contributor. Where a substantial contributor is a corporation, its officers and directors likewise will be disqualified persons, even if they don’t serve on the foundation in any capacity. Additionally, in the case of a foundation established by a smaller for-profit corporation, such entity could be a disqualified person itself if other disqualified persons collectively own more than 35% of the corporate sponsor, as is frequently the case. In some cases, individuals working in the for-profit sponsor’s Human Resources or other departments act like foundation officers, running the foundation’s daily operations even though they do not serve the foundation in an official capacity. If the foundation were to distribute an event ticket to such an individual, self-dealing could result because he or she could be deemed a type of disqualified person known as a “foundation manager.”

As explained above, any use of a foundation’s tickets that benefits one of its disqualified persons would violate the self-dealing rules—even if the “person” in question is actually a corporation. Therefore, although managers and employees of the corporate sponsor may not themselves be explicitly included in the definition of disqualified person, a self-dealing violation could result if giving the tickets to such persons would result in a benefit to the sponsoring corporation itself. Common examples of benefits to the corporation that can flow from allowing corporate employees to use foundation tickets include rewarding employee performance, assisting with employee recruitment and helping to retain employees.

MANY BELIEVE THAT IT IS PERMISSIBLE TO HAVE THE FOUNDATION COVER ONLY THE PORTION OF THE TICKET PRICE THAT REPRESENTS A DONATION TO THE CHARITY

Even if the corporation itself derives no obvious benefits from employee use of foundation tickets, if doing so furthers no charitable purpose of the foundation, the transfer of the tickets to the corporation could result in a taxable expenditure violation. For example, distributing foundation tickets in order to reward employees who have done the most charity work in the quarter would be permissible if promoting volunteerism is part of the foundation’s mission (assuming disqualified persons are not eligible to win). However, tickets raffled off to employees through a lottery (and not based on job performance, recruitment or retention goals) could be a taxable expenditure, even if it is not self-dealing, because no charitable purpose of the foundation is thereby advanced. In the corporate foundation context, it may be simplest and cleanest for the corporate sponsor
to purchase tickets to events directly from the charity. The corporation can always make as many tickets available to foundation staff as necessary to enable the foundation to carry out its work, and any additional tickets may be distributed by the corporation to its directors, employees or any other guests without fear of violating the self-dealing rules.

Conclusion

In responding to the plethora of invitations to attend charitable events, foundations should have a firm understanding of the rules concerning self-dealing and taxable expenditures. Because attending fundraising events can be an effective and efficient way to evaluate grantees, gain information about their programs, interact with other funders, and demonstrate commitment to an organization or cause, foundations should continue to participate when doing so helps advance their mission. However, foundation trustees, managers and employees must exercise caution to avoid exposing the foundation and its disqualified persons to potential violations and penalties.

The post How Private Foundations Can Avoid the Compliance Pitfalls of Fundraisers and Galas appeared first on Foundation Source.

There are plenty of things we all can do to be happier—and most of them require us to be intentional with our time, actions and thoughts. Numerous studies show that it’s not how much we have, but rather how we use what we have that has the greatest effect on our happiness, which the Berkeley study reminds us.

2. Happiness Spreads

Giving to others generates an abundance of benefits, not only for givers and receivers but also for those who witness acts of generosity. The UC Berkeley research also points to a virtuous cycle between giving and happiness: Giving makes people happier, and happier people give more. In fact, in our recent report of Gen Z and Millennials, we found that the next generation cited family as having a strong influence on their own desire to give.

Givers also regularly report increased feelings of satisfaction and competence, along with a greater sense of purpose. In 120 of 136 countries, says UC Berkeley, people who donated to charity in the prior month reported greater satisfaction with life. Furthermore, a Foundation Source study of more than 1,700 Americans who engage in charitable activities suggests that giving helps people feel more connected with their communities, too. People give to help family, their local community and friends or for religious or spiritual reasons.

GIVERS ALSO REGULARLY REPORT INCREASED FEELINGS OF SATISFACTION AND COMPETENCE, ALONG WITH A GREATER SENSE OF PURPOSE

The same is true for those who volunteer. The Foundation Source research found that many people engage in charitable activities by volunteering and aspire to continue doing so in the future. Donating time and expertise along with physical help can switch our focus from our own troubles to the needs of those around us, fostering social connections and benefiting everyone involved.

3. Physical Benefits

Medical experts are starting to focus on the tangential benefits of giving, too. In a UnitedHealthcare poll of people who had volunteered in the previous 12 months, the large majority felt healthier (cited by 76% of the respondents), had improved moods (cited by 94%) and reduced stress (mentioned by 78%). Similarly, a blog by the Columbia University Irving Medical Center recently said that generosity has the potential to affect health and well-being by boosting a person’s mood, self-esteem and the immune system, in turn reducing stress, anxiety and blood pressure. The associated chemicals that are produced by the body in response to giving can also help reduce physical discomfort and aid sleep.

4. Stronger Families

Engaging in charitable giving is also an ideal way for family members to bond with one another and strengthen multigenerational ties for years to come. By volunteering together and collectively determining which causes and charities they support, a family can clarify its values and traditions, improve its interpersonal relationships, deepen its social consciousness, learn new skills and increase their personal fulfillment.

According to 21/64, a consultancy specializing in next-gen philanthropy, the rising generation cites parents and grandparents as having the strongest influence on how they think about giving. Importantly, 21/64 also points to a “talk the talk and walk the walk” combination of direct teachings from parents and grandparents and observed behavior that helps shape and reinforce the views of younger family members. In our work, we’ve found that family foundations cultivate more involvement and strengthen family ties when they create roles for the next generation, tapping into the talents and passions of the younger family members. Doing so can also bolster the trust and communication between generations, something necessary to ensure a successful legacy of charitable ideals.

5. Giving Is Versatile

Depending on your interests, priorities and resources, the ways you may engage in philanthropy might vary considerably. As you chart a course for your giving, be sure you’re aware of the many options. For instance:

• You can make direct donations to the charities and causes you care about.
• You can set up a donor-advised fund or a private foundation to capture valuable tax benefits and formalize your family’s commitment to giving back.
• You can address philanthropy as part of estate planning to ensure that key values and priorities are passed from generation to generation.

Regardless of how you choose to give, there are philanthropic experts available to guide and assist you to make your generosity as impactful as possible—not only for your intended recipients but also for yourself in a way that enhances your overall wellness and happiness.

The post 5 Ways Giving and Wellness Are Connected appeared first on Foundation Source.

Bull markets can create significant built-in gains for investors. Liquidating those positions would result in capital gains tax, but those can potentially be sidestepped with in-kind gifts to charities and foundations. Those gifts can be larger as a result, creating a bigger impact. However, it’s important to note that the tax benefits can vary significantly depending on the type of asset donated.

Consider this example with publicly traded stock: Let’s assume a donor to a private foundation has 100 shares of stock with a current market value of $10,000 and an original cost basis of $4,184, resulting in a capital gain of $5,816. If the donor were to sell the shares, the capital gains tax would total $1,163 (assuming a 20% rate), leaving just $8,837 available for the donation.

But transferring those publicly traded shares directly to a charity or foundation allows the donor to contribute the full $10,000 amount without any tax consequence—about 13.2% more. Additionally, individual donors may be able to claim a tax deduction for the full market value of the donated shares—depending on their tax situation.
While publicly traded securities typically offer the most favorable tax treatment, other types of appreciated assets can also be used for in-kind gifts, including real estate and privately held business interests.

For instance, donations of non-publicly traded assets will typically limit the donor to a cost basis deduction (as compared to a fair market value deduction), so the tax benefit may be less substantial than with publicly traded securities.

2. Harvest Capital Losses

While it may seem counterintuitive in a rising market, there may still be opportunities to harvest capital losses. Even in a bull market, there are bound to be some companies and sectors that lag. Selling underperforming assets can lock in losses, which can be used to offset gains elsewhere in the foundation’s portfolio.

For example, if a foundation has a stock that has decreased in value from $10,000 to $8,000, selling it would result in a $2,000 realized loss. If the foundation has another asset that appreciated by $2,000, they can offset that gain with the loss. By potentially reducing the foundation’s overall tax liability, more funds can be freed for charitable purposes.

3. Manage MDRs

Under IRS rules, a foundation must pay out roughly 5% of its prior year’s average assets, known as the minimum distribution requirement (MDR), each year. Accordingly, when assets increase, the following year’s MDR will increase in tandem which could potentially strain a foundation’s resources as it evaluates the best methods of deploying the additional capital.

However, bull markets are also an opportunity to manage foundation assets for the long term. Foundations can take advantage of their growing portfolios by strategically over-granting in strong years to create a buffer for leaner times. By distributing more than the required 5%, foundations can keep the amount above the MDR in reserve for up to five years. These ‘credits’ can be used to meet the MDR in future years, which can be valuable in down markets, alleviating the need to sell part of the portfolio at a loss to meet the MDR, which can potentially eat into the corpus, or principal, of the foundation.

4. Pay Attention to Liquidity

In a rising market, non-income-producing assets like private company stock or real estate may still experience appreciation, which can increase a foundation’s MDR, but without providing the income needed to meet that requirement. If not managed well, that can lead to a liquidity crunch.

Establishing and maintaining a clear investment policy can help ensure that portfolios are managed in a way that maintains sufficient liquidity for a foundation’s distribution requirement.

Foundations should also ensure they comply with state-specific prudent investor rules. These rules require fiduciaries to act as careful investors would, considering the purposes, terms, distribution requirements and other circumstances of the foundation. For example, foundation assets should be invested for diversification to minimize the risk of large losses. Foundations and advisors should regularly review their investments and adjust their strategy when the portfolio is misaligned with the investment policy statement.

FOUNDATIONS AND ADVISORS SHOULD REGULARLY REVIEW THEIR INVESTMENTS AND ADJUST THEIR STRATEGY WHEN THE PORTFOLIO IS MISALIGNED WITH THE INVESTMENT POLICY STATEMENT

5. Be Cautious with Margin Trading

As market valuations increase, it may be tempting to trade on margin. However, foundations should exercise caution because margin trading can generate Unrelated Business Taxable Income (UBTI), which carries significant consequences for foundations. This may require filing a separate 990-T tax return, in addition to the usual 990-PF. In addition, the tax rate for UBTI is subject to taxation at the higher, for-profit rates, rather than the 1.39% excise tax that typically applies to a foundation’s net investment income. What’s more, calculations for UBTI can be complex, necessitating working with a specialist.

Instead of margin trading, foundations can explore other approaches to maximize returns. These include strategic asset allocation, mission-related investments, loans and recoverable grants and other types of impact investments that could potentially generate a return on investment.

Planning for Impact

Like a bear market, a rising market requires careful planning and strategic forethought. Foundations and advisors must regularly review their investment policies, distribution strategies and tax implications to ensure that they’re maximizing their charitable impact while maintaining their financial health.

Have questions about how to navigate the bull market for your foundation?
Our team is here to help! Contact us to schedule a consultation.

The post 5 Things Private Foundations Should Consider in a Rising Market appeared first on Foundation Source.

Robyn Hullihan: New philanthropists mean new ideas. The next generation is putting its mark on how foundations operate. Incoming philanthropists are looking inward and contemplating what role they might play in the sector. They’re committed to learning about the issues they want to support. They’re considering themselves as actors in that space, whether that means conducting more site visits, applying their own professional expertise or volunteering. Part of this reflection includes looking closely at new solutions to existing problems.

Going forward, there may be less support for organizations that focus narrowly on cultural preservation, such as traditional museums or performing arts organizations. But there might be a greater examination of how to help communities emerge from poverty, for instance.

Elizabeth Wong: As the nonprofit ecosystem is changing, foundations are finding a different place for themselves. Foundation boards are taking a closer look at the impact of their practices on their nonprofit partners. They’re asking: “What application information is necessary versus nice to have?” Perhaps it’s a nuanced distinction, but it can make an important difference in the time and effort required of a nonprofit when they’re seeking funding.

Similar questions are being asked about post-grant reporting and evaluation. When a foundation requests updates about the use of grant funds, is there a purpose beyond holding the grantee accountable? Foundations are working to integrate themselves into the ecosystem by aligning their objectives with those of their implementing partners.

We’re seeing foundation decision-makers exploring risk and their own willingness to make bets on new and possibly unproven interventions to support innovation. We worked with a relatively small foundation that was new to the sector they were working in. They determined that their strategy would be to go where other funders did not. They conducted deep research in their area of interest and discovered that some discrete activities could have an outsized impact. They could draw attention to the challenges faced by a particular community, and they were able to provide data that would be compelling to policymakers. What’s more, they could deploy their own expertise and communication to amplify the message.

We have one foundation client where the funder took a good look at their practices and recognized that they wanted to make applying for grants less of a burden on nonprofits. So they revamped their application process. Now it starts with a phone call where a board member collects information and populates the application themselves. The board member obtains much of the information in advance from public sources. That allows more time during the call to learn about the nonprofit strategy
and needs.

Hullihan: I’d also like to point out that foundations are seeking ways to get family members involved. Initially, this can mean talking about the work of the foundation and seeking input from the kids around the dinner table. Are there issues or causes they’d like to support and why? For young adults, involvement can be greater. For example, it might be to create non-voting seats on board subcommittees where family members can fully participate in the grant selection deliberations, helping to vet applications and discussing program strategy.

One foundation we work with devised a way to expand family members’ roles. In addition to creating board seats for the second generation, they set aside a portion of the foundation’s assets in a separate account and had the second generation make all the investment decisions for those assets.

Wong: Another example of new philanthropists and new ideas that we’ve witnessed recently is a foundation that is transitioning from decades under its initial leadership. For many years, the foundation has focused mostly on its role as a grantmaker distributing funds. The new generation on this board is looking at ways to bring in more expertise from the field and from community members themselves. They’re thinking about convening symposia, for example, and bringing in voices where the board of the foundation can hear firsthand what some of the nonprofit leaders’ challenges are, what solutions they’re exploring, and how the foundation itself can help, not just with dollars. The convening itself is potentially very powerful and not something the previous generation had ever considered.

The next trend is the changing foundation/grantee relationship. How have giving approaches evolved to embrace partnership?

Wong: Today’s nonprofit ecosystem is re-imagining the funder/grantee relationship. Historically, funders held a lot of power and nonprofits often felt compelled to shape their work to what was fundable. In other words, what the funder wanted.

Increasingly, the dynamic is shifting to one of partnership. The funder is asking more questions about what is important, what needs to be funded and how their dollars can help most. While foundation boards still retain fiduciary responsibility, they’re also acknowledging the expertise of nonprofit leaders.

Hullihan: I would also like to highlight partnerships among funders. Funders recognize that they can learn from other grantmakers. We see more and more foundations investing in their own education and looking to leverage the support they offer to communities alongside other funders. Informal and formal efforts to collaborate with others allow each funder to focus on their own priorities while also achieving greater impact together.

Finally, we’re also seeing a reconsideration of what foundations want to achieve and aligning their grantmaking practices to those objectives. For example, a foundation that has traditionally given to grassroots organizations recognized recently that they wanted to see greater scale. But the truth was their grantmaking was structured around deficit funding. They were used to supporting organizations that were living quarter to quarter, where the foundation’s dollars helped to keep the lights on.

This way of thinking was at odds with the growth and scale they wanted to see. If they wanted their nonprofit partners to be more strategic, increase capacity and affect more people, the financial planning changed entirely. Instead of how to survive, the conversation with nonprofits became about planning, growth and expansion. How could they attract and retain long-term and qualified staff? How could they invest in infrastructure so they could double and triple their programming? It was an entirely different consideration for both the funder and the grantees.

Finally, how are foundations leveraging tools and technology to drive efficiencies and create more impactful giving?

Wong: The right technology and tools make giving easier and make it possible to involve more family members and streamline grantmaking. One of those is something that Foundation Source offers: grant certificates. That is a digital gift card that enables the recipient to designate a nonprofit for funding. In the case of Foundation Source grant certificates, foundation leaders still retain the right to approve those recommendations, but it’s a terrific way to get children, family members and non-family members involved in giving.

Another tool that aids in the communication process between funder and grantee is a robust grant agreement. That way everyone is clear about what the intent of the grant is and what will happen, and what the funds will and won’t be used for.

Other tools that foundations are utilizing might include a set of questions that are asked to all applicants to ensure that decision-makers receive what they need for collecting information about potential grantees, particularly when you have a large volunteer board and different board members are talking to different nonprofit organizations. An established set of questions can really streamline the process of collecting information while also ensuring that the right information is being collected.

Hullihan: You can think of technology as an efficiency. Foundation management platforms like Impactfully from Foundation Source can make all the difference in how a volunteer board spends its time. Our proprietary technology is designed to help address all the day-to-day information needs of a foundation, allowing board members to focus on policy decisions, strategy development, grantmaking, and engaging members in building a legacy of giving.

In addition to technology solutions, our experts provide legal, accounting and philanthropic guidance towards greater efficiencies in these areas as well.

Now let’s turn to other trends we’re seeing. How has the increase of disasters in the world changed philanthropy?

Hullihan: More foundations are creating a separate bucket for disaster philanthropy because things are happening more often. They don’t want to have to wait until the next meeting. They want to have something available to devote toward disaster philanthropy.

I’m also seeing foundations being more strategic about disaster relief, rather than simply being reactive. When a disaster occurs, foundations are asking themselves, “Do we want to respond now or later in the recovery cycle when everyone’s moved onto the next news item but support is still needed? Or even focus on the long term where it might take years for a community to recover but they’ve been forgotten or overshadowed by more recent emergencies.”

Wong: The increasing number of disasters and crises is pushing boards to leave more dollars unspent throughout the year so they are ready to respond when a crisis happens.

How have younger leaders used their communication capabilities to help foundations?

Wong: Digital natives see the potential for a foundation to help amplify the work, messaging and priorities of their grantee partners. We work with a foundation that issues a press release when they make their grant approvals. They also feature one grantee per month via their multiple platforms of communications. By doing that, they’re extending the story to their broad network.

How do you navigate challenging family dynamics?

Wong: Sometimes when families are running foundations together, they bring their complex relationships with them. It can make a big difference to have a trusted outside partner in the form of a facilitator who knows the issues and is able to get to know the people and the dynamics. That can really help a group move toward an objective with less emotion and friction.

How do you engage the next generation when there are so many demands on their time?

Hullihan: We say, “Let’s try and meet the individual where they are.” It might not make sense to hold a junior board meeting, for example, if half the junior board is not able to attend. It might be better to start with a lunch-and-learn with an expert in the field or just speak with them about what areas of interest they might have and where there might be opportunities to work together down the road. That might be volunteering with an organization or it might be just experimenting with a small grant and learning about how that works.

Wong: The only constant is change, so while you might want the next generation to be involved, they might bring with them different ideas about how to do things. Then the question becomes, is there an openness to that among the current leadership?

How should foundations respond to all the shifts happening in the world, not just disaster related?

Hullihan: More foundations are interested in helping nonprofits work together so there is no overlap in services. Foundations are also collaborating with the other donors of their grantees so they can extend their reach, get the word out and find solutions together.

Writing op-eds that promote the work of grantees can be an effective way of raising awareness. Some of the most successful foundation websites are those that highlight the work of grantees, which draws other donors to understand what that work is and leverage additional support.

What are the emerging trends around staffing roles in philanthropy?

Hullihan: A lot of the hiring that foundations are doing is because they want to go deeper, they want to be involved. They might even want to be a leader as a funder around a topic. To do that, they are going to need staff that can do the research and make recommendations. And, as we discussed earlier, the trend toward streamlining the application process for potential grantees by completing a lot of the information for them, might mean more staff time is needed to take on this type of work.

Wong: There is also an increase in communications capabilities at foundations themselves. Foundations are finding their own voice and using their own platform to amplify the work of their partners, but they need people to help do this internally. This might mean hiring a marketer, copywriter or a social media coordinator.

This is a condensed and edited version of the conversation. You can watch the full video of Elizabeth and Robyn’s discussion here.

The post 3 Trends in Philanthropy: Thriving Through Transition, Technology and Teamwork – Q&A appeared first on Foundation Source.

Families are engaging the next generation of philanthropists, recognizing the need to bring in younger members. This generation is providing a fresh perspective and implementing new practices to philanthropy that differ from the past. These new leaders are diving in — going on site visits and volunteering with the organizations they support. They are also bringing their technical expertise to philanthropy by leaning into technology tools for increased efficiency.

The new generation has different priorities. They’re shifting their focus away from cultural preservation and toward social change. In the future, there might be less funding for cultural institutions such as museums or performing arts organizations and more for organizations working on poverty, for example.

They are also redefining the role of the foundation within the nonprofit ecosystem by scrutinizing the impact of foundation practices on nonprofit partners.

2. The Emergence of Philanthropic Partnerships

The funder/grantee relationship is undergoing a transformation. Historically, funders held the power and nonprofits shaped their work around the priorities of their funders. Today, the dynamic is shifting toward collaboration.

Funders are balancing their need for fiduciary responsibility with the desire to relieve their nonprofit partners of the administrative burdens so they can devote more of their time and energy to social change. In particular, grantmaking practices are changing as funders try to simplify the process. Some foundations, for example, fill out the initial grant request forms for their applicants from publicly available information and then enlist board members to gather more granular details through calls with the nonprofits. This takes time-consuming administrative tasks off the nonprofits, enabling them to focus on programmatic work.

In addition, partnerships among funders are emerging too. Foundations with similar interests are coming together to educate board members and staff and collaborate in ways that better support their nonprofits.

3. Efficient Technology and Tools Enable More Impactful Giving

Foundations are stretched thin and are looking for ways to improve efficiencies and engagement. Technology helps them achieve that. For instance, digital grant agreements and templates can streamline and accelerate the giving process without the need to create these documents from scratch every time. Grant certificates, similar to eGift cards, are a way to engage the next generation in giving. They can be given to children or grandchildren in specific denominations so they can make their own philanthropic gifts, and gain the experience of doing research and due diligence on the organizations they want to support.

In addition, foundations are seeing the benefits of integrated technology solutions like Impactfully, a cloud- based foundation management platform that improves transparency and facilitates collaboration across the various functions in a foundation and the various investment, tax, legal and philanthropic professionals that support it. Furthermore, advisory services like those from Foundation Source give foundations access to grantmaking experts and research that can help them make giving more impactful.

4. Additional Philanthropy Trends

Alongside the three big trends, the discussion touched on other ways that philanthropy is changing, such as:

• Disasters and crises: Ongoing cycles of natural disasters, military actions and other humanitarian emergencies mean funders are looking to be more strategic in their giving and less reactive. Some are creating a discrete bucket, so they have funds available following a crisis. Others are keeping some annual funds unspent for the same reason. Some foundations are taking an even more strategic role, by getting involved months after a disaster or crisis when media attention wanes, but communities still need help.
• Modern communication: As digital natives, the next generation is bringing their communication skills to their philanthropic work and helping to increase their foundation’s impact. They are using social media platforms to amplify the work of their nonprofit partners and even make policy recommendations.
• Emerging staff roles: As foundations seek to be more collaborative with their nonprofit partners, it requires additional staff to carry it out. Foundations are hiring more, with an eye toward staff who can support deeper engagement with communities, have stellar communication skills, and can conduct research.

To learn more about these trends and additional insights, listen to a replay of the webinar.

The post 3 Trends in Philanthropy: Thriving Through Transition, Technology and Teamwork – Key Takeaways appeared first on Foundation Source.

A DAF is a fund inside a public charity, a “sponsoring organization,” while a private foundation is its own separate legal entity with separate control structures and separate rules. There are some tax, governance and compliance differences between the two and, as a result, some favor DAFs while others favor private foundations. For example, donors to DAFs often get a better tax deduction, depending on the donor’s tax situation, while private foundations can do certain things that DAFs can’t, such as make grants to individuals and pay reasonable and necessary compensation to related parties for legal, investment and other professional services.

#2. Proposed Regulations and Definition Changes

• In 2006, the Pension Protection Act created a statutory framework for DAFs, including a definition for a DAF and special rules applicable to them. But we’ve been without regulations to interpret those statutory provisions for quite some time now.
• The final regulations are expected to be effective, at least per the proposed regulations, in the same tax year in which they’re issued instead of in the following tax year. For example, if you have a calendar year sponsoring organization—the public charity that’s hosting the DAF—the final regulations will be in effect as of January 1, 2025 even if they’re adopted in June of 2025.
• Because the risk remains that the final regulations might be applied retroactively, charities that sponsor DAFs are making changes now in anticipation of some of the things that are signaled in the proposed regulations.
• The definition of a DAF in the proposed regulations is much broader than the statutory definition. The statutory definition of a DAF is a fund at a public charity that satisfies two prongs: first, that the fund is separately identified by reference to contributions of a donor(s), and second, with respect to that fund, the donor (or somebody the donor appoints or designates) has or reasonably expects to have advisory privileges with respect to distributions or investments. If the fund fails either of these prongs, it’s not a DAF.
• The proposed regulations take an extremely broad view with respect to the first requirement—that the fund be “separately identified.” In fact, the newly proposed definition is so broad that it effectively makes every fund at every charity separately identified.
• Therefore, the focus for charities has been whether their funds will be considered DAFs due to satisfaction of the second prong— the requirement that a donor (or someone they appoint) has, or reasonably expects to have, advisory privileges with respect to distributions or investments. However, as a result of the broad definition of “donor advisor” in the proposed regulations, vastly more funds that weren’t previously considered DAFs—and that people don’t typically think of as DAFs, such as field-of-interest funds and memorial funds, may be treated as DAFs and subject to the special DAF restrictions.

#3. The Practical Consequences of the Proposed Regulations

• Sponsoring organizations may host a range of funds, some of which may not have been established as DAFs. For instance, a sponsoring organization may have field-of-interest funds and memorial funds, both of which can do things that DAFs are not allowed to do.
  • For example, if these funds are considered DAFs under the regulations and they make grants to organizations that aren’t classified as public charities, the sponsoring organization would need to exercise special oversight procedures known, collectively, as expenditure responsibility. However, many sponsoring organizations aren’t currently equipped to do so.
  • If a field-of-interest fund or memorial fund is treated as a DAF because of these broad interpretations, then it may no longer be able to engage in the kind of charitable work that it’s been conducting for many years.
  • Additionally, DAFs can never make grants to individuals. This is one of the big differentiators between DAFs and private foundations, which are allowed to do so under certain circumstances. If a field-of- interest fund or a memorial fund currently makes grants to individuals and the proposed regulations are made final, any such fund would be prohibited from doing so if it is reclassified as a DAF.
• Further, although contributions to DAFs are tax-deductible, donors need an acknowledgement letter from the sponsoring organization that contains DAF-specific language for the letter to be valid. This expanded definition of a DAF could result in the inadvertent omission of such language from donor acknowledgment letters issued for donations to funds that the sponsoring organizations didn’t consider to have been DAFs.

#4. The Impacts on Advisors

• The proposed regulations likewise impact a DAF donor’s professional investment advisor who provides advisory services to, and is paid by, the donor’s DAF. From the IRS’ perspective, this is seen as potentially abusive, on the theory that the personal investment advisor may not want assets going out from under their purview and, therefore, may steer the fund away from making distributions.
• With an 18-year gap between the enactment of the statutes and the proposed regulations, it has become very common for a DAF donor’s investment advisor to advise the DAF and to be paid out of DAF funds for their services. However, under the proposed regulations, a DAF donor’s personal investment advisor generally can’t be compensated out of DAF funds for advising on the donor’s DAF.
• Therefore, if these rules are applied retroactively, some investment advisors may be personally subject to tax penalties for such arrangements that are currently in place.
• There are a number of rules around prohibited benefits from donor-advised funds. Under the excess benefit rules of Section 4958 of the Internal Revenue Code (IRC), a DAF is not permitted to pay any level of compensation to a donor or a donor advisor. If it does, that is a per se excess benefit transaction and is subject to a penalty payable by the investment advisor. Further, the payment of this compensation will likely be treated as an impermissible taxable distribution as well under IRC Section 4966, with a penalty payable by the sponsoring organization.

#5. The “Anti-Abuse” Rule

• The “Anti-Abuse Rule” in the proposed regulations would fall under the taxable distribution rules of IRC Section 4966. Under this rule, whenever the donor or the DAF sponsor arranges for a subsequent use of grant funds in a way that the DAF could not engage in directly, then the two transactions will be collapsed and treated as if the DAF had engaged in the impermissible use of the funds directly, subjecting the sponsoring organization to a penalty.
• Under the proposed regulations, a sponsoring organization can be penalized due to an arrangement made solely by the donor without any involvement—or even knowledge—of the sponsoring organization. For instance, a DAF sponsor could comply with a donor’s request to make an unrestricted grant to a public charity, but the donor—unbeknownst to the sponsoring organization—could ask the charity to distribute the grant funds to individuals. Under the Anti-Abuse Rule, the IRS could collapse the two transactions, imposing a penalty on the sponsoring organization rather than on the donor who made the arrangement without the sponsoring organization’s knowledge.
• To navigate compliance with this rule and possibly reduce risk with respect to these grants, the sponsoring organization could require each grantee to agree in writing, at the time of the grant, that it will not consult with any donor, donor advisor or related party with respect to the grant. Doing so should support the position that prohibited arrangements for subsequent use of grant funds have been ruled out. While this wouldn’t necessarily prevent the IRS from collapsing the transactions if it were to happen, it may give the sponsoring organization a “reasonable cause” argument for avoiding the penalty.

A number of industry and professional organizations have submitted comments to Treasury on the above concerns with the hope that this will have some effect on the final regulations. Additionally, a public hearing was held by the IRS on May 6-7, 2024, during which attendees commented on all of the above concerns, among others. As of October 1, 2024, no final regulations on this topic have been adopted. We will continue to monitor these proposed DAF regulations.

Want to learn more? Check out the webinar here.

The post 5 Things Advisors Need to Know About the Proposed DAF Regulations appeared first on Foundation Source.

The key decision for any new foundation revolves around its legal structure. Foundations face the all-important choice between adopting a trust or a corporate structure and each one comes with its own set of pluses and minuses.

Trusts, which adhere to stringent fiduciary standards, operate under complex rules and regulations. Corporations, on the other hand, enjoy a high level of flexibility. Additionally, each legal form is subject to different tax rates regarding unrelated business taxable income (UBTI). All these considerations could sway the decision-making process around which legal form to adopt.

In addition, foundations must also define their mission and purpose, whether that’s broad or narrow. However, depending on the legal structure, it may be possible for future boards to revise that. For instance, corporate foundations can’t lock in their philanthropic purpose, while trusts can.
A trust’s governing instrument can only be changed with a court’s approval, unless the trust’s terms expressly permit its revision.

2. How will the foundation be funded?

Board members are responsible for making sure that investments are prudent. They must carefully review prospective investments beforehand and regularly review the foundation’s investment portfolio to see if adjustments must be made.

Because foundations have a 5% minimum payout requirement, board members should be on the lookout for investments that will produce enough return to meet that minimum. Relying solely on investments might not cover these operational expenses if the bulk of investments are in non- or low-income producing illiquid investments.

To have an accurate accounting of how much the 5% annual payout requirement is, foundations will need to obtain detailed annual valuations if they hold assets beyond cash and publicly traded securities.

3. How will the foundation avoid self-dealing and other violations?

Foundations are subject to strict self-dealing regulations, which generally prohibit transactions between a foundation and its insiders. Any self-dealing penalties must be paid by the self-dealer, not the foundation.

When it comes to corporate foundations, there must be clear distinctions between corporate employees’ roles and foundation activities. These lines can be blurred because corporate employees sometimes wear two hats when foundations are run by existing employees of the corporate parent. Therefore, it’s important to be clear about which capacity they’re active in and when.

Self-dealing rules can be complicated. Even seemingly beneficial transactions can still be considered self- dealing if they are between insiders and the foundation. For example, a foundation paying rent to a corporate parent, even if it’s below market value, would still be considered self-dealing.

4. How will the foundation navigate legal complexities?

To ensure that a foundation is operating according to all its legal requirements and in a way that fulfills its purpose, it’s important to have clearly written policies. These can guide both day-to-day operations as well as provide an operational framework.

Furthermore, it’s important to understand the differences between non-operating and operating foundations and how to meet the specific tests for operating foundation status, if applicable. The main difference between operating and non-operating foundations is that non-operating foundations typically fund programs run by other organizations (although they can conduct their own direct charitable activities). Operating foundations, meanwhile, run their own charitable projects or programs. The benefit of being an operating foundation is that you can offer donors more favorable charitable deductions.

Private foundations that don’t have the specialized staff, or legal and financial expertise within their own ranks, should consider bringing in external professionals. Work with accountants who are well-versed in form 990-PF, the annual tax return form filed by private foundations. For example, it takes specialized knowledge to understand how to calculate the 5% annual payout requirement, and it may not be something that foundation staff or officers will be able to do on their own.

5. What will guide board governance and responsibilities?

While officers, employees and managers of a foundation oversee the day-to-day operations, board members focus on high-level strategy, oversight and compliance. Board members bear three types of fiduciary duties: the duty of care, the duty of loyalty and the duty of obedience.

Beyond fiduciary duties, board members must also navigate complex governance dynamics. They are en- trusted with decisions about board size, member selection and succession planning. While some states set parameters around board composition, many do not. As a result, the task of organizing their foundation’s board falls directly on individual boards themselves.

One pivotal decision concerns the compensation of board members. Opting to compensate board members necessitates a transparent and fair process. To avoid conflicts of interest or the perception of a conflict, be sure to establish clear criteria and guidelines that adhere to industry standards. Additionally, because excess compensation paid to any insider, including board members, can result in a self-dealing violation and/or a tax- able expenditure violation, it’s important that the foundation determine the appropriate level of compensation in accordance with applicable IRS regulations.

To learn more about these key decision points, listen to the full conversation here.

The post Pivotal Philanthropic Stages: A Look at the Lifecycle of a Foundation – Key Takeaways appeared first on Foundation Source.