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Why Do Wealthy Families Set Up Foundations and How Do They Work?

When a business owner sells their business and is looking for a large tax deduction and has charitable intent, a common solution is setting up a private foundation to capture a large tax deduction.  In this video, we will cover how foundations work, what is the minimum funding amount, the tax benefits, how the foundation is funded, and more……. 

When a business owner sells their business or a corporate executive receives a windfall in W2 compensation, some of these individuals will set up and fund a private foundation to capture a significant tax deduction, and potentially pre-fund their charitable giving for the rest of their lives and beyond.  In this video, David Wojeski of the Wojeski Company CPA firm and Michael Ruger of Greenbush Financial Group will be covering the following topics regarding setting up a private foundation:

  1. What is a private foundation

  2. Why do wealthy individuals set up private foundations

  3. What are the tax benefits associated with contributing to a private foundation

  4. Minimum funding amount to start a private foundation

  5. Private foundation vs. Donor Advised Fund vs. Direct Charitable Contributions

  6. Putting family members on the payroll of the foundation

  7. What is the process of setting up a foundation, tax filings, and daily operations


About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

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Frequently Asked Questions (FAQs):

What is a private foundation?
A private foundation is a nonprofit organization typically funded by a single individual, family, or business. It’s designed to support charitable activities, either by making grants to other nonprofits or by conducting its own charitable programs. The foundation is controlled by its founders or appointed board members rather than by the public.

Why do wealthy individuals set up private foundations?
High-net-worth individuals often establish private foundations to create a lasting legacy of charitable giving, maintain control over how funds are distributed, and involve family members in philanthropy. It also allows donors to give strategically over time rather than making one-time gifts to multiple organizations.

What are the tax benefits of contributing to a private foundation?
Contributions to a private foundation are tax-deductible. Assets contributed to the foundation grow tax-free, and donors can make grants to charities in future years while capturing the tax deduction in the year of the initial contribution.

What is the minimum funding amount to start a private foundation?
While there is no legal minimum, some experts recommend starting with at least $1 million to $2 million in assets. This level of funding helps offset administrative, tax filing, and compliance costs associated with running the foundation.

How does a private foundation compare to a Donor Advised Fund or direct charitable giving?
A Donor Advised Fund (DAF) is easier and less expensive to set up and maintain than a private foundation. However, a private foundation offers more control over investment management, grant-making, and governance. Direct charitable contributions are simpler still but provide no long-term control or legacy-building opportunities.

Can family members receive compensation from a private foundation?
Yes. Family members can serve on the foundation’s board or be paid for legitimate services such as administration, accounting, or grant oversight. However, compensation must be reasonable and documented to comply with IRS rules for private foundations.

What is involved in setting up and maintaining a private foundation?
Setting up a foundation involves establishing a nonprofit corporation or trust, applying for IRS tax-exempt status under Section 501(c)(3), and creating bylaws or a governing document. Ongoing operations include annual IRS Form 990-PF filings, distributing at least 5% of assets annually to charitable causes, maintaining proper records, and adhering to self-dealing and investment regulations.

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