How a Private Foundation Can Be a Powerful Tool for Tax Savings

Creating a private foundation isn’t just about supporting charitable causes. For many individuals and families, it also serves as a strategic financial tool—one that offers meaningful tax advantages while allowing donors to stay closely involved with how their money is used. The ability to reduce current income tax liability, manage capital gains, and potentially reduce estate taxes makes private foundations an attractive choice for high-net-worth donors who want to give back while also preserving wealth.

Understanding What a Private Foundation Is

A private foundation is a nonprofit organization typically funded by a single source: a person, family, or business. Unlike public charities, which raise funds from multiple donors and rely on public support, private foundations usually rely on one primary donor to provide the majority of their funding. The foundation’s assets are then managed and distributed through grants to charitable organizations.

The key feature of a private foundation is control. The founder—and often their family—gets to decide who sits on the board, how the assets are invested, what causes are supported, and how grants are awarded. This makes it a highly customizable vehicle for both philanthropy and financial planning.

Tax Deduction on Contributions

One of the most immediate tax advantages of setting up a private foundation is the ability to claim a deduction for contributions. When you fund your foundation with cash, publicly traded securities, or other appreciated assets, you can take a tax deduction in the year the contribution is made, even though the funds may not be distributed to charitable causes until later.

For cash donations, you can deduct up to 30 percent of your adjusted gross income in a given year. If you contribute long-term appreciated securities, the deduction is generally capped at 20 percent of your adjusted gross income. If your contributions exceed these limits, you can carry forward the deduction for up to five years.

This gives donors the ability to “front-load” their charitable giving. If you’re expecting a particularly high-income year—say from the sale of a business, a stock windfall, or a large bonus—you can make a sizable contribution to your foundation, take the tax deduction immediately, and then distribute the funds over time in a thoughtful way.

Avoiding Capital Gains Taxes

Donating appreciated assets to a private foundation can help avoid capital gains taxes. Let’s say you bought stock years ago at a low price, and now it has significantly appreciated. If you were to sell the stock outright, you’d owe capital gains tax on the difference between the purchase price and the sale price.

However, if you transfer the stock directly to a private foundation, the foundation can sell the stock without paying capital gains tax. While you won’t be able to deduct the full fair market value (as you could with a donor-advised fund), you still receive a deduction based on the cost basis of the security, and you avoid the tax hit. This approach is especially useful for people with highly appreciated assets who want to unlock value for charitable use while reducing their tax exposure.

Lowering Estate Taxes Through Strategic Giving

Private foundations can also be part of a broader estate planning strategy. Assets contributed to a foundation are removed from the donor’s taxable estate, which can help reduce estate taxes down the line. For families whose estate is expected to exceed the federal exemption threshold, contributing a portion of those assets to a foundation can be a meaningful way to reduce the overall tax burden on heirs.

This also allows donors to shape how their legacy is carried out. Rather than simply writing a large check to a single charity in a will, a private foundation lets you define the mission, outline charitable goals, and appoint family members to oversee the distribution of grants. The structure gives you the ability to preserve wealth in a charitable vehicle while influencing causes that matter to your family for generations.

Annual Payout Requirement and Investment Income

Private foundations are required by the IRS to distribute at least five percent of their net investment assets each year. This ensures the foundation remains active and that charitable contributions are actually reaching communities and organizations.

Even with this requirement, foundations retain a significant amount of flexibility. If you’ve made a large donation in one year and only plan to distribute a portion of it each year, the remaining funds can be invested. The foundation can generate returns on those investments, growing the size of its future grants. Although private foundations do pay a small excise tax on net investment income (usually around 1.39 percent), this is generally modest compared to the tax savings available through contribution deductions and estate planning.

Salaries, Expenses, and Operational Deductions

Another aspect of private foundations that appeals to some donors is the ability to operate the foundation as a legitimate business. While the primary purpose must always remain charitable, foundations can hire staff, lease office space, and cover administrative expenses related to their operations.

In certain cases, family members can be compensated for their work as board members or staff—so long as those salaries are reasonable and in line with IRS guidelines. This allows for hands-on involvement in a way that doesn’t exist with other charitable structures. It also creates opportunities for younger generations to learn about philanthropy, nonprofit governance, and financial stewardship while receiving compensation for their time.

All operational expenses are paid with foundation funds and are not subject to income tax. For families that want to be deeply involved in grantmaking or that need administrative support to handle grant evaluations, event planning, or communications, this structure offers more flexibility than simpler options like donor-advised funds.

Flexibility in Grantmaking and Legacy Planning

Private foundations are not limited to granting money to public charities. With proper documentation and procedures, they can provide scholarships, support international nonprofits directly, and even offer grants to individuals in specific circumstances. This broadens the scope of giving well beyond what is allowed through traditional charitable donations.

When it comes to long-term planning, foundations offer a formal way to involve future generations. You can structure the foundation to continue in perpetuity, naming children or grandchildren as future board members. This creates a lasting charitable legacy while keeping assets within a purpose-driven structure, rather than seeing them taxed or distributed in ways that may not reflect your values.

When to Consider Starting a Private Foundation

Private foundations aren’t for everyone. The administrative requirements, legal obligations, and costs make them better suited for individuals or families with significant wealth and a clear desire for long-term philanthropic involvement with the help of a partner like Crewe. That said, for those who do meet the threshold, the tax benefits alone can make a strong case for setting one up—especially when paired with the ability to control your charitable impact.

If you expect a spike in income, plan to sell appreciated assets, or want to create a giving vehicle that doubles as a family legacy tool, a private foundation offers a structured and effective way to meet those goals while managing tax liability in a smart and ethical way.

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