If you’re expecting to leave a significant sum of money to charity as part of your estate plan, you might want to consider contributing it to your own private foundation instead of giving it directly to nonprofit organizations. A private foundation, controlled by your heirs or others that you designate, can achieve greater impact for the causes and organizations that matter to you while at the same time providing valuable tax benefits.
Although donating directly to nonprofit organizations can be appropriate in many instances, for the disposition of a large, testamentary gift, there are several reasons why a foundation would be a better and more responsible choice.
If you leave a large sum of money to a charitable organization without considerable advance planning, research, and relationship-building, it’s unlikely to achieve significant impact. Indeed, there are countless examples of large sums that have been squandered because they were donated all at once and without sufficient groundwork to pave the way for success. Some well-publicized examples of mismanaged philanthropy include Mark Zuckerberg’s gift to the Newark public schools, the Pearson brothers’ gift to the University of Chicago, and Garth Brooks’ support of an Oklahoma hospital. As the funds donated to a private foundation can be invested over time and are only subject to an excise tax of 1.39% on any net capital gains, its endowment can grow substantially over time. Foundations are only required to give away 5% of the previous year’s net assets each year, thereby furnishing foundation members the luxury of time to develop effective strategies and form productive partnerships. For this reason, private foundations are ideally suited for tackling complex issues that do not lend themselves to quick fixes.