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What’s the best type of private foundation, a non-profit or a charitable trust?

What’s the best type of Private Foundation? One established as a Non-Profit Corporation or as a wholly charitable trust?

The Non-Profit Corporation offers advantages:

a. The corporate structure offers flexibility because the corporate directors can easily amend the organizational documents, including changes in the corporate structure, election of new officers, etc. State law may require various approvals from state officials when the directors amend the corporate articles.

b. The standard of care to which the law holds a director is often less than that of a trustee. This means greater protection from personal liability for the directors as opposed to trustees.

c. If the Foundation will operate its own charitable program – as opposed to simply making grants – the corporate format may be better because its flexibility provides a better structure for running these programs.

d. If contributions will be sought from corporate donors, and grants will be made to overseas programs, a non-profit corporation should be used. Section 170(c)(2) provides: “A contribution or gift by a corporation to a trust, chest, fund, or foundation shall be deductible by reason of this paragraph only if it is to be used within the United States or any of its possessions. . .” Missing from this subsection, however, is corporate contributions to a Foundation organized as a nonprofit corporation; so, the nonprofit corporation should be used if overseas grants will be made and contributions to the Foundation may come from corporations.

e. The tax-exempt status afforded 501(c)(3) entities does not extend to UBTI, which is taxable at the entity’s tax rate as a trust or corporation. If UBTI ever results, corporate tax rates are generally lower than trust tax rates; so, a nonprofit corporation will probably pay less taxes than a trust if UBTI is generated.

The wholly charitable trust offers advantages:

a. A trust can be established more quickly than a nonprofit corporation, thus facilitating year-end tax planning. It is by far the preferred choice for Private Foundations created by testamentary instrument.

b. The trustees operate the trust in a less formal manner than a nonprofit corporation. As a rule, there are few state filing requirements, and no requirement for annual meetings or minutes (although certain decisions should be documented in writing).

c. The flexibility afforded by nonprofit corporation statutes may not be desired by some Donors. If the Foundation is created to serve religious purposes or some other deeply-held views of the Donor, the Donor may prefer to create a trust because the irrevocable nature of the trust will make it difficult for future generations to depart from the Donor’s charitable purposes.

A Reminder:

Creating and signing the documents isn’t enough. Once created as a valid legal entity at the state level, a Private Foundation must submit I.R.S. Form 1023-Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. If the Foundation files Form 1023 by the end of the fifteen month after the month in which the Donor creates the organization, the tax-exempt status of the Foundation (when approved by the Internal Revenue Service) will be retroactive to the date the organization was created. The 15-month period may be extended by 12-months. (See instructions for Form 1023). Our experience is that it takes from one to twelve months to obtain an IRS Letter of Determination which recognizes the tax-exempt status of the Foundation.

Michael W. Reagor