Private Foundation Rollovers: So You’re Sick of Your Foundation?

Private Foundation Rollovers: So You’re Sick of Your Foundation?

You are excited about philanthropy. You have a charitable mission. You have plenty of charitable goals. You decided to execute your philanthropy using a private foundation (PF) as your primary platform for funding that mission and those goals. When you established your PF, you were fully briefed on the administrative and operating burdens presented by a PF. You saw those burdens as mole-hills, not mountains.

Now, time has passed since the private foundation’s founding. You find filling board slots difficult. Reviewing federal tax filings has become an annoyance. At the end of each year, you scramble to choose grant recipients so that the foundation complies with the minimum annual grant requirement. You hate that the PF pays tax on net investment income.

Perhaps the challenges go beyond administrative. Maybe you support organizations in the cross-hairs of the “cancel” culture. Because Form 990-PF publicly disclose the name of supported organizations, the amount of the support, and the names of all donors to the foundation donating $5,000 or more, you are personally in those cross-hairs.

It’s no longer fun. The mole-hills have become mountains. What to do? Consider terminating your foundation through a grant to a donor-advised fund account.

What Does Rolling Over a Foundation Entail?

Terminating a private foundation requires two major considerations. First are the practical ramifications of shifting your primary gifting platform from a foundation to a donor-advised fund (DAF) account. Second are the legal intricacies of a private foundation termination.

First, the practical implications – pro and con.

Pro – you no longer must meet the administrative and expense burdens of operating a legal entity. You no longer need to review and file Form 990-PF. No more hiring and overseeing accountants and attorneys to prepare various periodic filings. No more paying the net-investment income tax. No more rushing to identify grantee organizations in order to meet the required annual distribution rules.

Once the foundation shuts its funds to a DAF account, and you make future donations to the DAF account rather than a foundation, these burdens go away.

All filing and additional administrative burdens associated with a donor advised account fall upon the 501(c)(3) DAF account sponsoring organization. The individual named by the foundation (presumably you) as the account advisor receives the privilege of advising amounts allocated to the account be distributed to qualified 501(c)(3) charities – generally any charity that is considered a publicly supported charity. On a periodic basis you receive DAF account statements from the sponsoring organization housing your account detailing activity within the account, so you remain fully informed and able to track progress on your charitable goals.

Most sponsoring organizations also grant you the privilege of advising how the funds allocated to the account are invested, though your investment choices are usually limited to investment pools maintained by the organization.

That said, often times larger accounts are given the privilege of recommending (that is, advising) that an outside investment advisory firm be engaged to manage funds allocated to the account. However, as mentioned, all of burdens associated with a foundation are now gone and you are free to focus solely on your philanthropy.

Why Might I Want to Keep My Private Foundation?

Cons? These come down to the aspect of control and the potential for a termination tax. With a little planning, however, you can control the impact of both.

As a board member and fiduciary of a private foundation, you have ultimate legal control over grants. Terminating your foundation by funding a DAF account and carrying-out other necessary filings eliminates that control. You must rely upon the grants committee of the organization housing your DAF to approve your grant advice. Keep in mind that all assets allocated to a DAF account are general operating funds of the DAF sponsoring organization. The donor to a DAF account must relinquish all dominion and control over the donated assets, and they have no legally enforceable rights with respect to assets allocated to the virtual donor-advised account. The sponsoring organization is free to disregard any advice received for any reason what-so-ever.

In most respects, the first con is a function of your mindset. The foundation must seek out a sponsoring organization for the donor-advised fund that shares the foundation’s (and presumably your) charitable goals and mission. And above all, you must look for an organization unlikely to succumb to the pressures that may be applied to organizations deemed politically incorrect for their grant making activities if that is of concern to you.

Sure, you may be able to shave off a few basis points here or there by using a commercial DAF sponsoring organization, but are you sure they will approve your advice to make a grant to that organization you love that has become controversial to some? You shouldn’t be. More and more commercial DAF sponsoring organizations, as well as some local community foundations that offer DAF programs, are not accepting advice for grants to perfectly legitimate 501(c)(3) organizations when they disapprove of the suggested organization and its mission.

Navigating the Termination Tax

The termination tax issue is actually the easier con to deal with. That’s because the IRS has issued enough guidance that we know with 100 percent certainty how to end a foundation without paying a termination tax. Since the tax is imposed on the value of assets held by a private foundation at the time of its legal, technical termination, the tax is easily planned around. Just be sure that the PF’s assets at time of termination are zero. Although easily avoided, it is important the formalities of the termination be observed and the timing of various acts occur correctly to avoid the tax.

One way to avoid the termination tax is to distribute foundation assets to a DAF account prior to the foundation’s formal, legal termination. By distributing all foundation assets to a DAF account for which you are an advisor, you can continue to pursue your charitable mission and goals by recommending grants from the DAF account that meet your charitable mission. The termination tax is avoided since the foundation distribution to the DAF account brings foundation assets to zero and occurs prior to the date of formal termination.

Although the private foundation must calculate a termination tax as part of filing its final Form 990-PF, the tax liability should be zero. The applicable tax rate times foundation assets of zero results in zero tax liability.

There are a number of other hoops to jump through as part of a termination, such as a board resolution adopting a termination plan, but all of these requirements are easily surmountable. Your tax and legal advisors can guide you through these steps.

Ultimately, you need to look at the specific characteristics of charitable tools available to you and chose the tool, whether a private foundation or donor-advised fund account, that may best facilitate meeting your charitable goals. You might conclude that having both a private foundation and a donor-advised fun d account makes sense.

DonorsTrust is not a law firm, and we cannot offer legal advice. Our discussion is educational in nature, only. You cannot apply the above to your specific situation, since there may be facts and circumstances that impact the general rules we discuss. If the idea of terminating your private foundation is appealing, you should consult your tax and legal advisors for assistance. We would be more than happy to discuss the general rules with you and your advisors, so please feel free to contact us for more information.

About the Author

Jeff Zysik Jeff Zysik
Jeff Zysik is COO and CFO at DonorsTrust. He is an attorney and accountant with fifteen years of tax planning experience, focusing primarily on sophisticated estate and income tax concepts. Before joining DonorsTrust, he was managing-director and co-founder of Charitable Entity Administration, LLC (CEA).

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