Seeking Advice
Individuals or families who are considering the establishment of a private foundation should seek technical assistance from a
tax attorney or certified public accountant who is experienced in handling nonprofit tax matters. Existing private foundations
are frequently able to recommend professionals who specialize in planning private foundations. Potential donors should consult
The Foundation Directory, a standard reference work, for the names of foundations in their geographic area. Bank trust
departments or trust companies may also be able to suggest appropriate attorneys or accountants.
Organization and Tax-Exempt
Status
All private foundations must qualify as tax-exempt organizations.
The foundation must file an application for tax exemption
(Form 1023) with the designated office of the Internal Revenue
Service. The IRS will then determine whether the foundation
meets the requirements for tax-exempt status. In addition,
the new foundation will probably have to file with a state
regulatory body and, when applicable, apply for exemption
from state sales or property taxes.
The IRS will not recognize a "formless aggregation of individuals" as a tax-exempt entity. Therefore, private foundations are
usually organized as corporations or trusts. Characteristics of these organizational types are as follows:
Corporation Most incorporated private foundations are set up as "nonstock, nonprofit"
corporations. Articles of incorporation are normally filed with the Secretary of State or the State Attorney General. Such a corporation, in general,
operates like a "for-profit" corporation. The foundation's board of directors elects officers, carries out the foundation's
activities, and records its deliberations.
Trust A private foundation organized as a charitable trust is governed by a trust instrument
that appoints initial trustees, sets forth their powers, and provides for orderly selection of future trustees.
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Formalizing an Exempt Purpose
The exempt purpose set forth in a foundation's charter or trust instrument defines the arena in which its grantmaking will
take place. In defining a purpose, the donor or donor family may wish to seek the opinions and advice of others. The founders,
managers, and directors of other private foundations can be especially helpful. There is a wide array of human and social
needs, and each private foundation has the opportunity to select which of these it wishes to address.
As mentioned earlier, exempt purposes of existing foundations run the gamut from global to highly specialized. The heavily
endowed giants of the field, as a rule, have broad purposes that enable them to be active in a variety of endeavors. Smaller
foundations often select specific areas of interest within such fields as science, medicine, education, the arts, social
welfare, or historic preservation. The responsibility for establishing a purpose rests with the donor, and there are no limits
except that it be a charitable one.
If the foundation is organized as a charitable trust, special care should be taken in selecting its purpose. Because it is
difficult to change a trust instrument once it has been finalized, this form of organization is best suited to donors who wish
to insure that their charitable aims endure as originally set forth. It is much easier to change the exempt purpose of a
private foundation organized as a nonprofit corporation, and donors interested in flexibility will find the corporate form
attractive.
The foundation's purpose should be clearly expressed and accompanied by a set of basic policies designed to insure that its
ongoing activities will be consistent with the original goal. These policy resolutions should be periodically reviewed.
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Choosing Foundation Managers
Whether organized as a corporation or trust, a foundation must have mechanisms for making and implementing decisions. It is
recommended that individuals with diverse backgrounds be included in the management process.
Kinds of foundation managers include:
Directors or Trustees The majority of private foundations have boards of directors or trustees.
Members of such boards are usually chosen by the donor or donor family, and they are often members of the donor family.
Ideally such boards should take an active role in setting the foundation's purposes and distributing its income. It's best to select as directors or trustees
individuals with a high level of interest and commitment to foundation activities.
Officers Foundation boards usually elect officers to assume the ongoing administrative duties
associated with foundation operation. These officers are usually selected from among the members of the board or the donor family.
Bank Trust Departments Bank trust departments are occasionally appointed as co-trustees for
private foundations organized as trusts. Some foundations use the part-time services of the bank trust officers to manage
their portfolios and carry out routine administrative duties such as meeting federal and state reporting requirements. While
bank trust departments and their officers can often provide adequate financial management, they are not always equipped to do
so, nor do they necessarily prefer to execute the grantmaking responsibilities of a private foundation. On the other hand,
some banks have come to specialize in this service and perform well. Other private foundations can help you make the
appropriate choice.
Paid Staff Larger private foundations frequently have full-time paid staff, while many smaller
foundations rely on accountants, attorneys, and supporting staff who are employed by the donor or donor family. Other
foundations hire part-time staff to carry out administrative duties. Meeting legal and investment responsibilities is not,
however, all there is to private foundation management. Foundations of all sizes that are committed to innovative and
sensitive grantmaking often find that they need professional staff members, whether full- or part-time, who have expertise in
the field in which grants are made, in grant management, and in communication with the public. Depending on the foundation's
resources, such professional assistance may be obtained from consultants or from individuals who are permanently employed by
the foundation. Experts in foundation programming can be located by contacting existing foundations, the Council on
Foundations, or the Indiana Grantmakers Alliance.
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Reprinted with permission from the Forum of Regional Associations of
Grantmakers
©2003 Indiana Grantmakers Alliance, Inc.
32 East Washington Street, Suite 1100
Indianapolis, Indiana, 46204
Phone: (317) 630-5200 | Fax: (317) 630-5210
Email: info@indianagrantmakers.org
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