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Perhaps the most rampant misconception among foundations is that once a grantee organization has been recognized as a public charity by the IRS, a foundation doesn’t need to verify the grantee’s tax
status each time a grant is made. Upon making an initial grant, many foundations do require a grantee to provide their determination letter, but this document may not reflect the organization’s current status. The IRS may revoke an organization’s public charity status at any time for any number of technical reasons. In fact, the IRS has revoked the charitable statuses of more than 450,000 organizations over the past several years for failure to file a tax return for three consecutive years. For this reason, a foundation should not simply accept a determination letter as incontrovertible proof of its applicant’s current status as a public charity. Instead, it must be careful to check the status each and every time a grant is made.

There are consequences to failing to validate an organization’s tax status. If the foundation makes a grant to an organization not classified as a public charity without following special procedures¹, the foundation may be subject to penalties. The “first tier” tax penalty is 20 percent of the grant amount and it necessitates filing a penalty return. Although a $4,000 penalty on a $20,000 grant might not constitute a devastating blow to the foundation’s endowment, it’s still an unpleasant surprise and a waste of charitable funds. If for some reason the penalty is uncorrected, a “second tier” tax penalty of 100 percent of the grant amount could be imposed.

So, how do you validate the status of your potential grantee as a public charity? Foundations may check the listing of an organization in Publication 78, which has been made a part of Exempt Organizations Select Check (“Select Check”), accessible on the IRS’s website, or in the IRS Business Master File Extract of key information on exempt organizations (the “BMF Extract”). Of these two options, the BMF Extract is the more comprehensive source for information concerning an organization’s tax status.

When an organization listed in Select Check or the BMF Extract ceases to qualify as a public charity, and the IRS subsequently revokes or changes its tax exempt status, the IRS notifies the public of such revocation or change by publication in the Internal Revenue Bulletin, which is published on a weekly basis via the IRS’s website. However, even after an organization’s tax exempt status has been revoked or changed, it might still be listed as a public charity by the IRS for a time.

Generally, the tax rules provide that when an organization has lost its public charity status but is still listed as such by the IRS, a grant made to it by a private foundation will not result in a tax penalty if the foundation:

• Was unaware of the change in or revocation of the grantee’s status at the time the grant was made;
• Was not responsible for or aware of the activities or deficiencies on the part of the grantee that gave rise to its loss of public charity status; and
• Made the grant prior to the date the IRS publicized the grantee’s loss of its public charity status in the Internal Revenue Bulletin or on the IRS’s website.

Although the BMF Extract is publicly available and provides detailed information, checking it yourself is difficult because it is neither simple nor easy to decipher. Foundations therefore typically rely on a user- friendly, third-party service to certify the nonprofit’s tax status in the BMF Extract. Per the IRS’s guidance in Revenue Procedure 2011-33, a foundation may rely upon third-party certification of an organization’s status as a public charity in the BMF Extract, provided that certain requirements are satisfied and the foundation retains a paper or electronic copy of the report that includes:

• The organization’s name and employer identification number (EIN);
• The organization’s tax status as a public charity (referred to by the IRS as “foundation status”) under Internal Revenue Code Section 509(a)(1), (a)(2), or (a)(3), including supporting organization type, if applicable;
• A statement of whether contributions to such organization are deductible;
• A statement that the information is from the most current update of the BMF Extract and the revision date of the BMF Extract referenced; and
• The date and time the information was provided to the foundation.

You will need to retain this printed or electronically stored record so that, 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.

Although most third-party services charge a fee, Foundation Source, in accordance with our mission to encourage safe, sound, and responsible philanthropy, offers GrantSafe®, a proprietary database based on the BMF Extract, as a free service. To ensure your grant is IRS compliant, GrantSafe 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. Finding an organization is as easy as typing in the organization’s name or tax ID number. A green check mark or red “X” instantly tells you the status. It generates a time-stamped certificate evidencing the organization’s public charity status in the BMF Extract for your foundation’s records and, like the paid services, it meets every IRS requirement for validation.

A foundation that makes grants without researching the public charity status of a grantee beforehand does so at its own peril, as the potential penalties can be costly. On the one hand, the rules governing private foundations are nuanced, but, on the other hand, the IRS provides tools upon which foundations may rely to research the public charity status of grantees so that grants can be made without fear of penalty. Although the impetus driving research about a grantee’s tax status may be compliant with tax rules, the results of the research can be surprising, revealing details about the organization that can be genuinely useful to foundations in making grantmaking decisions.

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The 2004 book, Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy, written by Russ Alan Prince and Hannah Shaw Grove, Foundation Source’s Chief Marketing Officer, indicated that many families had adopted an increasingly holistic approach to managing their affairs, creating numerous points of intersection among the various parts of their portfolio as they sought to achieve a range of investment, risk management, tax mitigation and philanthropic goals. However, many family offices felt there was room for improvement in the way philanthropy was conducted, as it did not fully reflect the personal interests and intent of the underlying family members.

Prince and Grove’s 2010 book, The Family Office: Advising the Financial Elite, revealed that as the leadership of the family moved from one generation to the next, they were likely to use the transition as an opportunity to tighten the focus of operations and streamline expenses within their family offices. Most commonly, this meant retaining investment management and related services in-house while outsourcing non-core services, such as philanthropic advisory and charitable planning. In many cases, the families still wanted and needed support for the outsourced activities but expected to rely on a carefully curated network of specialists rather than building that infrastructure within the family office.

The 2014 book, Taking the Reins: Insights into the World of Ultra-Wealthy Inheritors, by Prince and co-authors Jared Dubey, Richard J. Flynn, and Brett Van Bortel, explained that rising generations (those who were not yet controlling wealth but actively assuming larger and more influential roles within their family) were keen to use their resources to tackle key social and environmental issues but readily acknowledged some gaps in their own skills and experience. As such, there was high interest in learning more, meeting like-minded people, and getting more involved to improve philanthropic activities and outcomes.

New Discoveries

Six years later, there is new research from two generations of family members with family offices that illustrates a natural evolution of the above-mentioned trends and shows that philanthropy remains an important but potentially undermanaged component of the family agenda due in part to diverging generational views.

In contrast to the founding generation, who are typically focused on wealth creation, inheritors are proportionately more involved in philanthropic endeavors and expect to have even greater involvement in the future (Exhibits 1 and 2).

For all generations in a family office, the core motivation is helping others but founders are more likely to see philanthropy as a way to build a personal legacy while inheritors see it as a mechanism for benefiting society (Exhibit 3).

And, lastly, relatively few members of either generation have worked with outside experts like philanthropic advisors or private client attorneys to help formulate and execute their charitable agenda. This last point demonstrates that there is still room to enhance and possibly institutionalize the structure and process of their philanthropic activities (Exhibit 4).

Being charitable is an important consideration for many wealth creators and inheritors, but in many family offices, the support mechanisms for philanthropy are no longer part of the core operating infrastructure. And, as younger family members assume more prominent roles setting the direction for the family’s wealth management, there is wider acknowledgment that they need professional guidance and a peer network to synchronize the overarching priorities of the family and its charitable activities and ensure that philanthropic assets are deployed in ways that will deliver maximum impact.

Key Opportunities for Advisors

These findings translate into several opportunities for advisors to better support their charitably inclined clients:

• Expand the client discovery process to include a discussion of charitable goals, which can help uncover unspoken aspirations and interests.
• Address philanthropy as part of the financial plan (and investment policy, as appropriate), which can lead to multi-dimensional relationships and new pools of assets.
• Help clients evaluate charitable vehicles based on their giving style and long-term objectives.
• Create client connections within your practice, and more broadly within your community, that will bring like-minded people together to learn and collaborate.
• Source technical expertise that will help your clients advance their philanthropic missions and provide a complementary perspective to yours, delivering a more complete service experience.
• Check in periodically with clients to diversify your conversations, evolve your relationship, and demonstrate the link between their financial plans and the realization of personal passions.

If you’re ready to deepen the relationships with your most charitably inclined clients and set your practice apart from the crowd, consider discussing these findings with them.

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• A corporate foundation can engage in charitable activities that would not be tax deductible if handled directly by the company. These include loans for a charitable purpose that are paid back to the foundation; grants to for-profit entities when they are used for a charitable purpose or to advance the work of the foundation; scholarship programs; and even grants to individuals for disaster relief and economic hardship.
• It can allow for a more consistent level of giving: building an endowment in years when company profits are high that can be tapped into during less profitable years.
• The company can avoid capital gains taxes when highly appreciated assets—such as stock, land, and other appreciated property—are “gifted” to the corporate foundation.
• Staffing and overhead for the foundation can be paid by the foundation, resulting in a reduced cost to the company.
• When named for the company, the foundation’s charitable activities reflect positively on the company’s image. Similarly, a company with a well-known and respected name can generate greater public visibility for the foundation’s charitable activities.
• The foundation’s funding guidelines can help company executives gracefully turn down inappropriate funding requests, especially from friends, customers, and employees.
• Unlike donations made directly by the company, foundations are not required to collect substantiation receipts from nonprofits for gifts greater than $250. For companies with matching gift programs, or that make many small donations, this means they do not have to expend resources tracking and collecting these receipts.

Starting a Corporate Foundation Has Never Been Faster or Easier

Foundation Source will establish your corporate foundation and have it ready for funding in less than a week. Over the past decade, we’ve created over 2,000 foundations and have developed a proven and streamlined process.

Here’s what’s included:

• Creation of the foundation entity (a Delaware nonprofit corporation)
• Bylaws and essential governance policies
• Preparation and filing of the IRS application for exempt status (Form 1023)

OUTSOURCED EXPERTISE AND SUPPORT SERVICES TO ESTABLISH AND HELP YOU MANAGE YOUR CORPORATE FOUNDATION

Simplified Foundation Management

Foundation Source provides a full suite of services to keep your corporate foundation running efficiently, effectively, and compliantly. This allows your staff to devote their time to strategy and program development, as well as the needs of running your business.

We take care of everything: state and federal filings, transaction accounting, document management, compliance monitoring, transaction processing for grant checks, transmittal letters, expenses, and fees.

You’ll also enjoy peace of mind knowing that foundation experts are keeping watch to help you avoid compliance issues that can result in financial penalties, reputational harm, and even loss of exempt status.

Below is a brief summary of our foundation management services.

ADMINISTRATIVE SUPPORT

We provide the day-to-day support all corporate foundations need to operate efficiently and compliantly. This includes transaction recordkeeping, active compliance monitoring, grant check processing, and state and federal filings. There’s no need to hire additional staff or burden existing employees with duties they aren’t trained for.

ONLINE RESOURCES

Foundation Source Online® is a secure, web-based platform for managing foundation activities, including charity research, grantmaking, reporting, viewing investment balances across all accounts, and checking your 5% minimum distribution requirement. Viewing rights and permissions are individually defined for each staff member given access to the site. It provides transparency into foundation activities and facilitates communication and collaboration among those involved.

PHILANTHROPIC ADVISORY SERVICES

We have philanthropy, tax, and legal experts to get you started and then take your foundation to the next level. Services are coordinated through a dedicated Private Client Advisor, who serves as your primary contact and gets to know you and your foundation inside and out. In addition, our Philanthropic Advisory Services team has extensive experience in partnering with corporate foundations. Foundation Source clients have access to customized advisory services, tools and resources that enable foundations to maximize the impact and efficiency of their philanthropy. Contact us today to learn more.

STREAMLINED GRANTS MANAGEMENT

Applications facilitates the grantmaking process, making it easy for your foundation to accept and review online applications while also making the process convenient for your applicants. Because applications are submitted electronically, staff can efficiently organize and manage grant requests; centrally communicate about them; review them online; and easily generate data and reports.

Outcomes helps the foundation track the impact of its charitable donations, monitor performance, and request formal reports, all from a simple web console. It automates the process of collecting key performance information from nonprofits, including how grant funds were spent, grantee’s progress towards goals, unexpected challenges, and lessons learned.

EMPLOYEE ENGAGEMENT

These optional services are available through our network of preferred partners: workplace giving, volunteer tracking, international programs, fundraising campaigns, and disaster relief.

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• Increased income tax rates
  • Individuals to 39.6% (ordinary) and long-term capital gains (LTCG) and dividends for taxpayers with adjusted gross income (AGI) of more than $1 million
  • Increase in corporate tax rate from 21% to 28%
• Gifts, bequests, trust distributions as capital gains realization events
  • Loss of capital gains“step-up”
  • Gifts and certain trust distributions as realization events
  • 90-year trust realization event
  • $1 million exclusion

THE POTENTIAL IMPACT ON CHARITABLE GIVING

• The top marginal individual income tax rate would increase from 37% to 39.6% for taxable income in excess of the top bracket threshold—as tax rates rise, the value of itemized deductions also rises.
• For taxpayers with AGI of more than $1 million, long-term capital gains and qualified dividends tax rate would increase to match the proposed ordinary income tax rate. For a taxpayer with income in excess of $1 million, rates would jump from 20% (or really 23.8%, including the net investment income tax) to 39.6% (or really 43.4%, including the net investment income tax).

2. The House Ways and Means Proposal

• Return of proposed estate tax changes instead of capital gains tax
  • Accelerate “sunset” of current estate tax levels (effectively dropping in half from $11.7 million to about $5.5 million)
  • No mention of loss of “step-up” or gifts/distributions as realization events
• Income tax changes
  • Highest personal rate to 39.6%; capital gains rate to 25% – 3% surcharge for in come over $5 million
  • Corporate rate to 26.5%
  • Changes to certain cross-border tax rates and rules
• Changes to grantor trusts (pulled into taxable estate)
• IRA changes
  • Increased required minimum distribution for high-income taxpayers with large balances ($10 million plus, and can never stay over $20 million)
• In terms of charitable giving, like with the Green Book proposals, higher taxes lead to a more valuable deduction
• Estate taxes
  • Brings a lot more people into the estate tax net
  • Eliminates a lot of common planning for reducing estates (e.g. grant or trust planning) – Eliminates valuation discounts
  • Makes gifts to charity and certain charitable lead trusts far more valuable

3. The ACE Act

Co-sponsored by Senators Angus King (I-ME) and Chuck Grassley (R-IA)

• Private foundations would no longer be allowed to count grants to DAFs towards meeting the annual minimum distribution of income requirement (MDR) if the private foundation retains advisory privileges.
  • Note: This is not a concern for a terminating foundation or for a foundation that grants to a DAF account over which the foundation has not retained advisory privileges.
• Private foundations would no longer be able to count administrative expenses (for example, payroll, travel, and other similar expenses) of certain insiders towards meeting the MDR.
  • Note: This limitation is targeted only at insiders who are family members of a foundation’s substantial contributors. The payroll and expenses of non-family members would still count towards satisfying the MDR.
  • Note: This rule would still allow foundations to pay salary to and cover the expenses of the targeted insiders—these expenditures would not be taxable expenditures. However, such expenditures would not count towards satisfying the MDR.
• Private foundations that choose to sunset within 25 years would pay no excise tax. However, if such a foundation makes prohibited grants to related foundations, or it opts not to sunset at the point in the future when it is required to do so (after not paying excise taxes for 25 years), the foundation would have to pay the IRS any taxes it saved because of this tax break.
• Private foundations would pay no excise tax in any year in which it satisfies a voluntary 7% payout requirement determined by reference to the value of the foundation’s assets on the first day of the tax year.
• A private foundation that uses DAFs to avoid “tipping” of the public charity status of a donee may no longer be able to do so, as distributions from DAFs will be treated effectively as distributions from the private foundation.

THE POTENTIAL IMPACT ON DAFS

• For non-community foundation DAFs, generally, the legislation would allow a current charitable deduction for cash or marketable security gifts to a DAF only if such gifts are distributed by the DAF to charities within 15 years of the first contribution to the fund and all advisory privileges terminate.
• There are narrow exceptions to these rules for DAFs that are set up at community foundations, but the exceptions apply only for amounts donated up to $1 million or there is a 5% MDR on the individual qualifying community foundation donor-advised fund.

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The personal charitable deduction for donating appreciated capital assets to a private foundation is typically limited to the donor’s cost basis. However, an exception exists for donations of “qualified appreciated stock,” generally allowing donors of publicly traded stock a fair-market-value deduction. An abbreviated definition of “qualified appreciated stock” is stock of a corporation for which market quotations are readily available on an established securities market. The stock must be held for at least one year, such that its sale would give rise to long-term capital gain. This exception does not apply to any other type of security, even those that are publicly traded, like bonds, publicly traded partnerships, and options. Additionally, the IRS has signaled that they won’t consider restricted stock to be qualified appreciated stock if the foundation can’t sell the donated stock because of holding period requirements.

2. Step Up the Foundation’s Cost Basis in Capital Assets

A private foundation is unable to carry forward capital losses to future years. Rather than allowing losses to disappear forever, a foundation can sell its appreciated capital assets and offset the resulting capital gains with the unused capital losses. Further, the foundation may immediately repurchase the capital asset because the “wash sale” rules apply only to capital losses, not capital gains. This strategy has the effect of providing stepped up basis for appreciated capital assets. Since the private foundation excise tax does not differ between short- and long-term gains, there is no downside to restarting the holding period.

RATHER THAN ALLOWING LOSSES TO DISAPPEAR FOREVER, A FOUNDATION CAN SELL ITS APPRECIATED CAPITAL ASSETS AND OFFSET THE RESULTING CAPITAL GAINS WITH THE UNUSED CAPITAL LOSSES.

3. Maximize the Donor’s Personal Charitable Deductions

Except for contributions of cash and qualified appreciated stock, contributions of appreciated assets to private foundations are generally limited to cost basis. That said, a foundation can make the so-called “conduit” election for any tax year to permit donors the foundation’s donors to treat donations made in an election year as though they had been made to a public charity. If the conditions are met for making a conduit election, donors of appreciated long-term capital assets, such as real property, are allowed a fair market value deduction and may benefit from higher adjusted gross income (AGI) percentage caps. These conditions require a foundation to (1) have satisfied its 5% annual minimum distribution requirement (MDR) for the year in which the conduit election is made (the election year), (2) satisfy next year’s MDR by the end of the election year, and (3) disburse the full value of all property and cash donated to the foundation in the election year within two and a half months after the close of that year. These conditions are often too onerous to be practical. But if a foundation has accumulated excess distributions carryover over its past five tax years, it can apply those carryovers in lieu of actual granting to satisfy the conduit election requirements. Excess carryovers are created when a foundation pays enough grants and qualifying expenses in a tax year to satisfy that year’s and the following year’s MDR. The excess carryovers from a given tax year can satisfy a future year’s MDR for up to five years, after which any unused carryovers expire. The charitable rollover rule allows those aged 701⁄2 and older to make tax-free charitable donations from their IRAs to private foundations making the conduit election, up to $108,000 per year (for 2025), and count it towards meeting their required minimum distribution.

4. Preserve Endowment with Program-Related Investments

Many foundations choose to satisfy their MDRs by making Program-Related Investments instead of or in addition to traditional grants. A Program-Related Investment (“PRI”) is essentially a charitably motivated investment that often takes the form of a zero or low-interest loan, secured or unsecured, to another charitable organization but can also take the form of a loan guarantee or even an equity investment if certain conditions are met. In the year a foundation makes a PRI loan or other qualifying investment, the funds advanced are treated as though they were traditional grants for purposes of satisfying the MDR. Repayment of the loan principal or recovery of the investment in a given tax year will increase the MDR on a dollar-for-dollar basis in the next tax year. Making PRIs permit a foundation to “recycle” its assets by making new PRI loans or other qualifying investments with funds that were repaid or recovered. By contrast, when a foundation makes a grant, the foundation never expects to recover those grant funds. An often overlooked tax benefit of PRIs is the exclusion of the value of all PRI assets when a private foundation calculates its MDR. For instance, suppose that a foundation invests $1 million in blue chip stocks.

The value of that stock will add roughly $50,000 (5% of $1 million) to the foundation’s MDR. By contrast, if the foundation makes a $1 million PRI loan or other qualifying investment instead, the foundation’s ownership of that investment won’t add a dollar to the foundation’s MDR.

MAKING PRIs PERMIT A FOUNDATION TO “RECYCLE” ITS ASSETS BY MAKING NEW PRI LOANS OR OTHER QUALIFYING INVESTMENTS WITH FUNDS THAT WERE REPAID OR RECOVERED.

5. Consider the Potential Liquidity Dilemma Posed by Certain Investments

Non-productive investment assets that do not generate income, such as a vacant lot or building, increase the foundation’s MDR by roughly 5% of the asset’s value, but do not provide the means to satisfy the increased MDR. For example, land worth $2 million will add roughly $100,000 (5% of $2 million) to the foundation’s MDR. If the land produces no rental income to help satisfy the MDR, the foundation may lack sufficient cash or other liquid assets to do so.

6. Eliminate Capital Gain with In-Kind Grants

If a foundation sells a significantly appreciated capital asset, it will recognize a capital gain and be taxed at the usual 1.39% tax rate. Instead of selling the appreciated asset, a foundation can make an in-kind grant of that asset directly to a charity, thereby eliminating the capital gain. The value of the appreciated asset at the time of the grant will be treated as the amount of the grant for purposes of satisfying the foundation’s MDR.

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YOUR FOUNDATION CLIENTS

Your clients continue to govern their foundations, set strategy, and make all granting and investment decisions. They will continue to work with you and their existing wealth advisor and attorney.

YOUR FIRM

You’ll gain access to the foundation’s reconciled asset and transaction data through our online platform. We do all the “behind-the-scenes” administrative work while your firm maintains its role as the primary tax advisor and preparer for the foundation. We make it easier for you to:

• Calculate quarterly excise taxes
• Prepare and file federal returns (990-PF and related filings) and state filings

HOW WE HELP

While supporting you as the foundations’ tax advisor, we also provide all the other services that are required to keep foundations running smoothly and compliantly on a day-to-day basis. Your clients will be supported by a dedicated Private Client Advisor who will serve as the primary contact and coordinate all services provided by Foundation Source.

Foundation Source Services Include:

ADMINISTRATIVE SUPPORT

Our professional staff handles the details that keep your clients’ foundations running smoothly, so they can focus on their philanthropic goals. We take care of the following:

• Grant processing and disbursements
• Expense processing
• Active compliance monitoring of foundation activities
• Tracking the foundation’s progress toward meeting its 5% minimum distribution requirement
• Foundation accounting and reconciliation
• Coordinating with you to facilitate your tax work

SPECIALIZED ONLINE TOOLS

Every foundation gets access to Impactfully, a secure, web-based “command center” that centralizes administration. Developed specifically for the needs of private foundations, this award-winning technology platform simplifies foundation control, communication, and collaboration. Designated foundation members get instant access and total transparency into foundation activities. Features include:

• Individually customized viewing rights and granting permissions
• An integrated database and specialized tools for charity research and grantmaking
• Online tracking, and reporting, including investment balances across all accounts

PHILANTHROPIC ADVISORY SERVICES

Foundation Source Philanthropic Directors are experienced professionals who are available to provide philanthropic advice to the foundation via periodic phone consultations. If the foundation requires more extensive support, our Philanthropic Directors can provide in-depth, custom engagements.

FOUNDATION CREATION

If a client doesn’t already have a foundation, but is thinking about establishing one, we are happy to work with the family’s attorney to coordinate services. Alternatively, we can provide the foundation entity and file IRS Form 1023 for recognition of exempt status. We’ll also provide articles of incorporation, bylaws, and investment, expense, and conflict of interest policies, which can be modified by the foundation.

In Summary

We have decades of experience supporting private foundations. We know that foundations and their needs come in all shapes and sizes. Our goal is to take the time to understand your practice and your clients, so we can help forge the best path forward. In the end, your clients want to make a difference with their philanthropy… and it’s our mission to help them do just that.

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