How To Set Up a Family Foundation

Jenny Handwerk |

How To Set Up a Family Foundation


Do you want to make a long-term good difference? Creating a foundation is an excellent approach to supporting social good initiatives that you are passionate about. Individuals, families, and corporations are all allowed to establish their foundations. 

If you want to leave a lasting legacy for your family or have grown increasingly conscious of an unmet social need, establishing your foundation will help you move your ideas forward. Let's start with the fundamentals.

Private family foundations are charity organizations established by families to serve the public and effect positive change in the community. They can be a crucial instrument to encourage stewardship of a family's beliefs and bring members together in a joint endeavor, in addition to their charitable purposes.

These foundations are established to assist philanthropic purposes such as education, healthcare, environmental conservation, or any other charitable purpose.

Private family foundations play an essential role in philanthropy, allowing families and individuals to make a long-term influence on issues that are important to them. They give you power, tax breaks, and the ability to leave a charitable legacy. 

Individuals or families often fund private foundations. The IRS imposes stricter rules on private foundations because they must achieve a yearly "payout requirement." Private foundations are frequently a direct representation of individual or family ideals. The Bill and Melinda Gates Foundation is a well-known example of a private foundation.


Steps to Start a Foundation



  • It establishes the formation documents and applies for a Tax Identification Number. It's worth noting that this can be done in Trust or Corporate form, and an attorney can advise you on which is best.


  • Creating an IRS Tax Exemption Application, once filed, it may take the IRS months to review, but once granted, the exemption is retroactive to the date of incorporation.


  • I am creating a Conflict of Interest Policy to be submitted to the IRS along with the tax exemption application.


  • Registering as a newly constituted charitable entity with the State Attorney General's Office


  • Choosing when, what assets to use, and how much money to put into the foundation. The answers to all of these questions will impact how much the contributor can deduct when funding. 


  • Establishing operating procedures



Benefits of a Private Family Foundation 


Create a Legacy


A family foundation leaves a legacy for future generations. Carrying down the family name through a charitable enterprise has tangible and intangible advantages. Having the gravitas of a philanthropic foundation behind a name opens more doors, making the foundation's work easier. It also aids in putting structure around gifting. Families can focus on the causes they feel connected to while passing on others that do not line with their goals by forming a foundation with a clear vision.


Control over your philanthropic donations.


Being charitable with a plan for donating might be manageable. There are approximately 1.5 million NGOs in the United States alone, so no shortage of causes may benefit from resources. But how do you know you're supporting a cause that aligns with your beliefs? Starting your private foundation is one method to ensure that your donations go to a cause that is important to you. 


A current-year tax deduction


Although individual benefactors frequently rush to claim their tax deductions at the end of the year, private foundations can take a more leisurely and deliberate approach. With a private foundation, you receive the tax benefit when the foundation is established, and then you make charitable contributions over time. The only criterion is that your foundation makes "qualifying distributions" of at least 5% of its average net assets each year. 


Avoid High Capital Gains


Donations to a private trust can avoid high capital gains tax rates and decrease income tax liability. For example, when donating valued stock to a private foundation, the donor can deduct the full fair-market value and avoid paying capital gains tax. Outside of a foundation, capital gains rates on assets held for at least one year are 15% or 20%, depending on income. When a foundation sells appreciated stock, it must pay an excise tax of 1.39% on the capital gains.


Make Loans Instead of Grants 


You may want to invest in a documentary film firm that raises awareness of your favorite humanitarian cause. Instead of an outright grant, consider making a low-interest loan to a nonprofit (such as a charter school or church) to build a new facility while undertaking a capital campaign. You can achieve all of this and much more with a private foundation.


Grow Assets Tax Efficiently


The compounding growth of equities, paired with the tax benefits of paying only 1.39 percent excise tax rather than capital gains taxes under a private foundation, can quickly pile up and make the foundation a viable expanding legacy.

Consider Jane, a wealthy individual who is establishing a foundation. If she donates $250,000 to her private foundation each year for five years and makes 8% per year, his foundation will have around $1,429,000 after excise taxes and minimum yearly charitable donations of 5%. 



Family foundations now account for more than half of all United States private foundations, including family, independent, and corporate foundations. The motivations for forming a family foundation are as diverse as the issues they promote. While families should not base their decisions on the tax benefits of a foundation, foundations are an efficient approach to optimize philanthropic giving and have a long-term impact on the causes that are important to them.