What are the Operational Requirements Relating to the Management of a Private Foundation?

August 6, 2015 by Gina M. Giacone, Partner | Marilee J. Springer, Partner
What are the Operational Requirements Relating to the Management of a Private Foundation?

The following is an excerpt from Ice Miller's Business Transition Strategies to Preserve Wealth Guide, which provides insights on a variety of topics to help ensure a smooth business transition.  

While a private foundation can serve as an excellent means of achieving a donor’s charitable giving goals, there are many specific, complex requirements and restrictions placed upon a private foundation’s operations. For example, a private foundation is subject to excise (or penalty) taxes on certain actions, including taxes that apply to:
  • Transactions with certain insiders (e.g., the donor, directors, officers or family members of these individuals);
  • Failing to distribute an appropriate amount of its income on an annual basis in a qualifying manner;
  • Expending funds on certain prohibited activities;
  • Engaging in excessive investments in business enterprises; and
  • Investing its funds in a manner which jeopardizes its charitable purposes.
The prohibition against engaging in transactions with insiders is among the most restrictive and onerous of these limitations. This prohibition affects the foundation’s ability to enter into any transaction, including compensation arrangements, with the founding individuals and members of their family – even if the transaction is beneficial to the foundation. Care must therefore be taken to ensure that such transactions are either avoided or structured in a manner that will not harm the foundation or its tax-exemption.

Ice Miller - Requirements of private foundationsGiven the potential impact of a failure to comply with these requirements, it is important that the operation of a private foundation be given appropriate time and attention. Therefore, a donor must either be willing to commit a substantial amount of time to maintaining or operating the foundation, or engage an outside consultant to provide these services. Ice Miller is experienced in the management of private foundations and can assist in ensuring that the appropriate attention and oversight are dedicated to the management of a foundation.

To learn more, download the Business Transition Strategies to Preserve Wealth Guide or contact Gina Giacone or Marilee Springer

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