Creating Your Own Philanthropy

There are a number of options to choose from if you would like to create your own philanthropy, such as setting up a private foundation or establishing a fund within a community foundation. These options provide for different ways to meet your charitable goals and have differing tax consequences.

Types of Funders

Community Foundation:
A community foundation is a tax-exempt, publicly supported, philanthropic institution composed primarily of permanent funds established by many separate donors for the charitable benefit of the residents of a defined geographic area. Grants are made for a range of educational, social, religious and other charitable purposes. Typically, a community foundation serves an area no larger than a state.

Community foundations provide an array of services to donors who wish to establish endowed funds without incurring the administrative and legal costs of starting private foundations. As public charities, community foundations are usually eligible for maximum tax deductible contributions from the public. There are more than 700 community foundations across the United States today. The 11 community foundations in New Mexico are listed on page 11 of this report.

Corporate Foundation:
A corporate (company-sponsored) foundation is a private foundation that derives its grantmaking funds primarily from the contributions of a profit-making business. The company-sponsored foundation often maintains close ties with the donor company, but it is a separate, legal organization, sometimes with its own endowment, and is subject to the same rules and regulations as other private foundations. There are more than 2,600 corporate foundations in the United States holding some $17.8 billion in assets, but the Foundation Center only identities 20 in New Mexico. (See Corporate Giving Program.)

Corporate Giving Program:
A corporate giving (direct giving) program is a grantmaking program established and administered within a profit-making company. Gifts or grants go directly to charitable organizations from the corporation. Corporate foundations/giving programs do not have a separate endowment; their expense is planned as part of the company's annual budgeting process and usually is funded with pre-tax income. The Foundation Center has identified more than 1,400 corporate foundations/giving programs in the United States; however, it is believed that hundreds more operate around the country.

Donor Advised Fund:
A fund held by a community foundation where the donor, or a committee appointed by the donor, may recommend eligible charitable recipients for grants from the fund. The community foundation's governing body must be free to accept or reject the recommendations.

Family Foundation:
"Family foundation" is not a legal term, and therefore, it has no precise definition. Yet, approximately two-thirds of the estimated 63,000 private foundations in this country are believed to be family managed. The Council on Foundations defines a family foundation as a foundation whose funds are derived from members of a single family. At least one family member must continue to serve as an officer or board member of the foundation, and as the donor, they or their relatives play a significant role in governing and/or managing the foundation throughout its life. Most family foundations are run by family members who serve as trustees or directors on a voluntary basis-receiving no compensation; in many cases, second- and third-generation descendants of the original donors manage the foundation. Most family foundations concentrate their giving locally, in their communities.

Independent (or Non-Operating) Foundation:
These private foundations are usually founded by one individual or a family, often by bequest. They are occasionally termed "non-operating" because they do not run their own programs. Sometimes individuals or groups of people, such as family members, form a foundation while the donors are still living. Many large independent foundations, such as the Ford Foundation, are no longer governed by members of the original donor's family but are run by boards made up of community, business and academic leaders. Private foundations make grants to other tax-exempt organizations to carry out their charitable purposes. Private foundations must make charitable expenditures of at least 5 percent of the market value of their assets each year. Although exempt from federal income tax, private foundations must pay a yearly excise tax of 1 or 2 percent of their net investment income.

Operating Foundation:
Also called private operating foundations, operating foundations are private foundations that use much their income to provide charitable services, to run charitable programs of their own, or to conduct research. They make few, if any, grants to outside organizations. Such grants are generally related directly to the foundation’s program. To qualify as an operating foundation, specific rules, in addition to the applicable rules for private foundations, must be followed. Decisions are generally made by an independent board of directors.

Private Foundation:
A nongovernmental, nonprofit organization with funds (usually from a single source, such as an individual, family or corporation) and programs managed by its own trustees or directors, established to maintain or aid social, educational, religious or other charitable activities serving the common welfare, primarily through grantmaking. U.S. private foundations are tax-exempt under Section 501(c)(3) of the Internal Revenue Code and are classified by the IRS as a private foundation as defined in the code.