When it comes to your charitable giving, you likely have a lot of questions. What is 501(c)(3)? What is the difference between a private foundation and a public charity? Answering questions like these will help you decide the right move to make your money matter when giving to a cause near and dear to your heart.
Before you decide where your spare cash and appreciated assets should go, here is a breakdown of what you can expect from a private foundation vs a public charity.
What is a Private Foundation?
Before you give a financial gift, you want to ensure that your money is going to be well spent in accordance with your wishes. Many private foundations lack the publicity of public charities, but that does not necessarily mean that they offer less of a benefit to the community they serve. Instead of being operated by the government or being funded by the general public, private foundations are held by a smaller group.
Generally speaking, private foundations tend to be held by families or a small collection of people who share a similar vision for how resources should be allocated.
For many people, a dive into the intricacies of a private foundation will put their minds at ease before giving a sizable gift. Just because they are not held to public accountability does not mean that they are less effective. The IRS holds them to operating restrictions and heavy excise taxes if they fail to comply.
What is a Public Charity?
The flip side of a private foundation is a public charity. They may serve the same goal as a private foundation, but their way of going about it is significantly different. Public charities tend to receive the majority of their financial support from either the public at large or the government compared to the small circle of people giving to a private foundation.
There is a marker that identifies public charities, known as the public support test. At least one-third of their revenue must come from small donors, other public charities, or the government. As long as this requirement is upheld, the remaining two-thirds can come from other sources.
Public charities have a board of directors, and at least half of them should be composed of people who are not related by blood, marriage, or business partnerships. You may know public charities like churches or homeless shelters in your community already, as they tend to be easy to locate and donate to.
Private Foundations vs Public Charities
One of the important things to note about private foundations and public charities is that both qualify as 501(c)(3) charities. Private foundations are the default designation for those who apply for this tax-advantaged status with the IRS, but you can also apply for public charity status if you meet the criteria.
With that in mind, how do you decide between private foundations and public charities for your giving?
Higher Tax Deductions for Public Charities
If your goal right now is to minimize your tax liability at year-end, then you might want to think about giving to a public charity over a private foundation. It is important to weigh how much you want to deduct from your taxes before planning to give.
Private foundations limit tax deductions to 30 percent AGI for cash and 20 percent AGI for securities. By comparison, public charities can offset your tax liability by up to 50 percent AGI for cash and 30 percent for non-cash securities.
More Control for Private Foundations
Private foundations tend to offer more control to donors, especially if you are the one running the foundation. Your family can make up the entire board of directors and directly influence the outcome of your giving. You can give to individuals making a difference in the community or even run your own charity.
The choice is yours.
Public charities are beholden to the laws and decisions of a more diverse board of directors. This could be beneficial for someone who wants to ensure that their legacy holds up to scrutiny more than a private foundation but takes away some of your control.
Private Foundations Give to Public Charities
Keep in mind that private foundations can also give to public charities, giving you the best of both worlds. The reverse is not true, however. While there are restrictions on how private foundations can spend their money, this type of giving is a commonly accepted practice.
It is an easy way for them to meet their minimum giving requirements without doing lots of heavy lifting or needing to prove that they spent money in accordance with the law. They can simply cut the check and keep the receipt for year-end proof of money donated.
Choose a Charity with Magellan
Magellan believes in helping you set up charitable remainder trusts, donor-advised funds, and other charitable vehicles that honor your wishes and give back to the community upon your passing. We offer comprehensive estate, legal, financial, and tax planning so that you can maximize your gift and reduce your taxable estate. Our experts can help you decide between a private foundation and a public charity for your giving.
Reach out to us today to learn more about whether our services are the right fit for your financial legacy!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.