Fund Vs Foundation Advantages
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There are numerous advantages to establishing an endowed fund within the Community Foundation rather than undertaking the time and expense to create and manage a private foundation. These include the following: |
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Private Foundation |
Community Foundation |
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1. Time, cost to establish |
$3,000 to $5,000 and from 6-9 months to create bylaws and receive 501 (c)(3) determination letter from IRS |
Falls under Community Foundation bylaws; $3,000 to $5,000 to create and about 3 months to receive 501 (c)(3) determination letter from IRS. |
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2. Cost of staffing |
Part or full-time salary, benefits plus accounting fees; foundation should have assets of $10 million plus to warrant staffing, but costs of staff use up assets that could go to charity |
1% annual fee based on value of fund usually covers all expenses |
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3. State, federal requirements |
Annual report |
Community Foundation handles all of this at no additional cost |
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4. Funding options |
Donations of appreciated stock can be deducted at full asset value only until 5-31-97. Most other assets may not be given to private foundations at their full value; property is valued at cost or limited to 20% of AGI |
Appreciated stock can always be deducted. Most assets can be given at full value, plus a wide variety of planned giving instruments can be employed |
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5. Tax consequences |
Cash deduction is limited up to 30% of adjusted gross income. Foundation must pay 2% federal excise tax annually on net investment income |
Contributions valued up to 50% of AGI. No such tax applies |
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6. Administrative issues |
Trustee must verify non-profit status and evaluate program effectiveness of prospects; make grants, and monitor results Foundation must give away at least 5% of assets each year Need to maintain expensiveliability insurance for directors; you can be held personally liable for violations Eventually, someone (an attorney, paid staff or trustee)will have to administer the foundation |
Community Foundation staff handles all such details No such requirement; can hold assets for the long-term if necessary Falls under Community Foundation's coverage & bylaws You incur no liability Community Foundation will always serve in this capacity, working with or without assigned trustees |
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7. Scholarship programs |
Must first obtain IRS approval re: objective selection, then provide regular reports on each student's progress or incur a significant tax penalty |
No such requirements; can manage any number of scholarship funds |
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8. Owning a business |
Private foundations may not own a controlling interest in a for-profit business (limit is 20%) |
Does not apply to Community Foundation; business owners can achieve substantial tax advantages when selling |
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9. Self dealing issues |
All dealings between a private foundation and those who support or are related to it are closely regulated or prohibited |
No such oversight applies |
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10. Giving Issues |
Any grants to other private foundations or new agencies that have not yet received non-profit status are closelymonitored by the IRS Grants are typically limited to direct gifts or scholarships Anonymous gifts not possible |
No federal reporting requirements for such grants apply Can give anywhere A wide variety of giving options are allowed |
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11. Investment Issues Can give anonymously |
Must hire investor assistance; form investment committee; oversee all activity; limit types of investments |
Community Foundation handles all of this for you Fewer investment limits |
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12. Overall effectivenesss |
Private foundations are often isolated from other regional philanthropic efforts |
All funds fall under the Community Foundation's professional memberships,* creating many opportunities for interaction, collaboration |
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* If you anticipate raising additional funds from other donors In summary, at one time individuals and families who wished to engage in long-term philanthropic activities had only one choice -- the costly and burdensome private foundation. As an example, if your client's foundation had assets of $5 million, it would typically distribute $25,000 a year. Do they need a staff or an expensive, time-consuming administrative structure to do that? Today, with the advent of community foundations, a much more cost-effective and flexible alternative exists. Because a Community Foundation receives most of its funds from the public, and is governed by a board of community leaders who are aware of local needs and represent the public interest, a Community Foundation is classified as a public charity. This gives living donors to the Community Foundation many significant tax advantages over those available to the founders of private foundations. In essence, trustees who establish funds or bequests with a Community Foundation can enjoy all of the benefits of a fully staffed private foundation at a fraction of the time and cost requirements, while realizing significantly greater tax and asset valuation benefits. Source: Chester County Community Foundation |
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