For many donors, opening a Fund through the Community Foundation makes more sense than establishing a private foundation.
Community foundations are different from private foundations. They have a broad mandate to serve their communities, and can’t limit their focus to a few areas. Community foundations are made up of many individual charitable funds, some that are for unrestricted purposes, and others that are for particular fields of interest, some broad, others narrow. Some funds are set up by will or through deferred giving arrangements, some by living donors who recommend grants.
Differences between a private foundation and a community foundation:
- Taxes: The tax deduction for cash gifts to a private foundation is more limited than the deduction for gifts to a community foundation.
- Payout Requirements: A minimum of 5% of a private foundation’s net asset value must be paid annually for charitable purposes, but a community foundation has no minimum payout requirements. This allows for greater flexibility with gifts of assets that produce little current income such as undeveloped real estate.
- Investment: Private foundations must research its own investment vehicles, while Fund investments are handled directly by the community foundation.
- Operations and Administration: Administration of a private foundation can be costly and time consuming, while all the Funds at a community foundation share administrative costs. Private foundations that make grants to other foundations or organizations that have not gained 501(c)3 tax exempt status must report to the federal government. Community foundations must demonstrate that the money is used for charitable purposes but does not need to report to the federal government.
- Public Disclosure: A private foundation’s tax returns and those of its contributors must be publicly available for six months, while specific donor funds at a community foundation may remain anonymous.
- Purpose: Changing the original, restricted purpose of a private foundation may require costly court proceedings, but if the restriction on a community foundation Fund become impractical the Board of Directors may vote to select a similar recipient.